It is early days for macro-prudential policy. It marks a radical departure from the past because it gives prudential tools an explicit role in managing the risk-taking cycle and activity in the wider economy (Haldane (2014)). To date, the focus of macro-prudential policy has been on the risks arising from leverage on the balance sheet of banks – the quantity of risk. That is why existing macro-prudential tools have tended to focus on bank capital and other bank balance sheet ratios. Yet if risk in the financial system, and activity in the wider economy, are shaped importantly by asset management behaviour and associated pro-cyclical swings in risk premia, then this focus may be too narrow. Macro-prudential action may be justified even when leverage is not present and when banks are not at the scene of the crime. Modulating the price of risk, when this is materially mis-priced, could be every bit as important as controlling its quantity. This is the next frontier for macro-prudential policy – whether, and if so how best, to moderate excessive swings in risk premia across financial markets which risk damaging the financial system or wider economy. This will require new analytical techniques to measure risk premia and their impact. And it will require fresh thinking on new policy tools to moderate movements in these risk premia. This is, in effect, an agenda for the second-generation of macro-prudential policy frameworks. BIS central bankers’ speeches  9  Third, portfolio allocation.
For example, PWC recently forecast that AUM would top $ trillion by 2020 (PWC (2014)). Simply extrapolating GDP per capita trends forward using the relationship in Chart 3, AUM could reach $ trillion by 2050. If these trends are even roughly right, asset management may not only have come of age – we may be about to enter the Age of Asset Management. As important as the absolute scale of the asset management sector is its composition. On the assets side, a number of important trends are at play. One is the rapid growth in specialist funds, often investing in less liquid asset classes. This is evident in the growth of so-called alternatives, such as hedge, private equity, real estate, infrastructure and commodity funds. These have risen from under $ trillion AUM in 2003 to over $ trillion by 2012, or from 5% to 10% of global AUM (Boston Consulting Group (2013)). Accompanying that, there has been strong growth in funds active in specialist, often illiquid, markets – for example, high yield bond funds and emerging market funds. Since 2008, these funds have grown at an annual rate of around 40% per year, outpacing growth in the global mutual fund industry by a factor of four (Chart 4). 3 Also rising rapidly have been flows into US mutual loan funds, which spiked to $ billion in 2013 having averaged $ billion in the preceding three years.