If financial resilience is to keep pace with the changing system, regulations must serve not just conduct of business and market integrity, they must also be prudent from a macro perspective. The growing non-bank system must be able to serve the wider economy not just in the good times, but also in the bad. See, for example, Xiaoxia Lou and Albert Y. Wang, ‘Flow-Induced Trading Pressure and Corporate Investment’, Journal of Financial and Quantitative Analysis, February 2018. 18 FSB, ‘Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities’, January 2017. To operationalise some of the FSB recommendations, the IOSCO, the international body of securities regulators, in 2018 issued recommendations and good practices to improve liquidity risk management for investment funds – see ‘IOSCO issues recommendations and good practices to improve liquidity risk management for investment funds’, media release, February 2018. 19 See the FCA’s Business Plan 2019/20 and ‘Consultation on illiquid assets and open‑ended funds and feedback to Discussion Paper DP17/1’, Consultation Paper CP18/27, October 2018. 17  19  All speeches are available online at www.bankofengland.co.uk/news/speeches  19  Conclusion  Macroprudential may no longer be the buzz phrase it was a decade ago. But its objective of promoting a financial system that can serve households and businesses in bad times as well as good remains as important as ever. The avoidable damage caused by the economic tremors of 2008 is a salutary reminder of the costs a fragile financial system can impose on an economy.
This isn’t an issue about a single fund or even about funds invested in a single asset class. Any incentive for investors to be at the front of the queue might be detrimental to the resilience of finance for the real economy. The emerging evidence is that companies whose existing liabilities are subject to selling pressure from funds tend to cut back new issuance and – presumably to protect their cash flow position – cut both investment and employment.17  If these new forms of finance are to give maximum support to long-term economic growth and investment, we need them to be consistent. So, after highlighting this issue in late 2015, the FPC supported the work of the Financial Stability Board (FSB) of the G20, culminating in the FSB’s January 2017 recommendation that market regulators should ensure funds’ redemption terms are consistent with their assets and investment strategy.18 Since then, global market regulators, who are at the coal face of these issues, have been turning this recommendation into new rules. Here in the UK, the FCA is finalising its own rules for funds investing in illiquid assets to strengthen liquidity management. 19  These are global issues. So macroprudential authorities across the world will need to review new global asset management rules. An assessment is needed of whether they will be effective in dampening any restriction to the supply of finance during economic downturns.