The European Fund and Asset Management Association (Efama) has declared that the European investment fund sector is not capable of undermining financial stability to the extent that it results in systemic risks.
This was outlined in a recent ambitious report from Efama, the mouthpiece of the European Asset Management sector. The report concludes that the European investment fund sector is not systemically important, and is unlikely to have a significant impact on the stability of the financial sector as a whole. This contradicts the belief held by many regulators that investment funds contribute to systemic risks.
Efama concluded that the Financial Stability Board (FSB) method of identifying economic activities that could lead to systemic risks, known as the NBFI Narrow Measure, is flawed. The methodology overlooks key players that could contribute to risks in the financial system.
Investment fund risks
Efama urges policymakers and regulators to rethink investment fund risks. Current views on this are outdated and ignore the positive contribution investment funds make to the real economy, according to the lobbyist.
The voice of the European investment industry recommends ways to improve the liquidity management of European investment funds and increase transparency. Fund managers should be given access to all available liquidity management tools to prevent panic selling, which increases volatility and systemic risk. Managers also need to have a better understanding of their end investors. At present, this is not always the case, which could potentially create risks.
Efama emphasises the importance of successfully implementing the Capital Markets Union in Europe, which requires further growth of the investment fund sector. The report states that the sector plays a crucial role in enhancing the diversity and resilience of the European capital markets, which in turn allows capital to be better allocated to investment opportunities in the economy.