In summary, over the course of the past decade or so, the asset management industry has fundamentally changed shape. It is now large and is set to get larger still. The assets it manages are increasingly being allocated into illiquid assets or indexed strategies. And the risks on these asset allocations are increasingly being borne by (perhaps trigger-happy) endinvestors. Too-big-to-fail Given this evolving structure, what risks to financial stability might the asset management industry pose? The financial crisis alerted us to the perils of banks that are “too-big-to-fail”. During the crisis, the collateral damage from big bank failure necessitated state bail-outs. These nourished the beast that had already eaten the farm. A variety of regulatory reforms are being put in place in an attempt to house-train this beast (Haldane (2012a)). 4  Some of this is a mirror-image of trends in the pensions industry, but the pattern is also evident for nonpension savings products. BIS central bankers’ speeches  3  One natural question, then, is whether the asset management industry has spawned similar such behemoths. Two relevant factors here are, first, the relative degree of concentration in the industry and, second, the scale of its largest players. Table 1 shows the world’s top 10 largest asset managers and banks by asset size. The degree of concentration across the two industries is broadly similar. The top 10 asset managers account for just less than 30% of the sector, the top 10 banks a little more than 20%. Their balance sheets are also similarly-sized.
Without further reforms, and depending on the nature of the next crisis, we may well be forced to test the limits of our mandate – a concern that has been voiced by Germany in particular. I offered three “lines of defence” that any well-functioning monetary union depends on: flexible markets, adequate national fiscal buffers and a common fiscal instrument to cope with large shocks. The logic is simple and compelling. Flexible markets for goods, services, labour and capital reduce the need for costly macroeconomic stabilisation and curb contentious debates about 1/3  BIS central bankers' speeches  crisis management. They reduce both the likelihood and impact of shocks and allow economies to bounce back more quickly. And they save much of the precious political capital governments had to spend on acrimonious crisis discussions. But flexible markets come at a price. In a downturn, they often impose economic hardship on workers through job losses or wage cuts. Governments can mitigate these effects. Unlike the United States, however, the European Union is not a federation. This means that – as a rule – stabilisation needs first to take place at Member State level. Building and maintaining adequate room for action at national level is therefore essential. This is what our fiscal rules are about.