A proposed methodology for labeling financial firms as “too big to fail” is unlikely to affect a large number of firms, says Fitch Ratings in a new report.
Earlier this week, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) proposed a methodology for assessing whether financial firms, other than banks and insurers, could pose systemic risks, and should be considered “systemically important”.
Policymakers have already been through this exercise for banks and insurers, which will face tougher regulatory requirements as a result. Now, they are extending it to other sorts of firms, including asset managers and brokerage firms.
However, Fitch says that it likely won’t capture a wide range of firms. It suggests that the framework would likely affect only a small number of institutions with very high asset totals.
Apart from Goldman Sachs and Morgan Stanley, which are already designated as systemically important, Fitch says that no other securities firms are expected to meet the proposed size and complexity standards outlined by the FSB.
In the asset management sector, Fitch suggests that the FSB proposal appears to be primarily focused at the fund level. Although it notes that the proposed treatment of large asset managers, as opposed to their funds, “stands out as an area where additional clarity from global regulators will be required before a full understanding of the FSB methodology is possible.”
Currently, Fitch says it sees little, or no, future impact among the largest firms in the U.S., where the number of institutions with assets exceeding the $100 billion threshold is very small. And, in Europe, there are only a few firms that come close to the asset limit, it says.
It also estimates that there are 14 U.S. funds that would exceed the threshold. “However, if the focus is at the asset manager level, the number of U.S. firms that could potentially be impacted would be materially higher,” it says.
“Regardless of whether the focus is ultimately on asset management companies or their funds under management, there will likely be active discussion among regulators and market participants as to the extent to which either introduces systemic risk or simply transmits the views and acts of their investors,” Fitch says, adding that it believes regulated funds do not present a significant source of systemic risk.
“Certain large and leveraged hedge funds could pose broader systemic risk in times of market stress and are an appropriate area of focus,” it says.