In our in-depth analysis of the new FSB proposal on asset-management regulation, we note the profound differences between it and the approach demanded for global banks and insurance companies. This reflects not only the hard-won recognition by FSB that asset management is different than banking and insurance, but also the formidable task of crafting prudential standards that work regardless of national circumstance and business focus. For all their differences, banking and insurance are from a sectoral perspective considerably more homogeneous than asset management, with the more straightforward prudential frameworks governing each also contributing to the FSB’s ability to finalize global requirements – controversial as of course they are. We expect these underlying structural differences to determine FSB’s next asset-management steps, leading to a final prudential framework that gives national regulators tools with which to do more or less what they want. Key tools FSB proposes include:
- leverage measurement techniques that could be used by national regulators to impose capital constraints on hedge funds or others found to be at unacceptable levels of redemption risk;
- liquidity stress criteria already proposed in the U.S. and to be constructed by the FSB for ready deployment by other national regulators; and
- living-will requirements born of the asset-transition requirements. The financial-stability focus of these transition requirements is similar in construct to that recently finalized by the FSB for G-SIIs, but far less prescriptive.
As with Basel’s pending “step-in risk” capital charges, much in the FSB framework will fall first on banks and G-SIIs or other insurers subject to regulatory regimes that are focused on financial-stability considerations. If you have any questions or would like additional information, do not hesitate to inquire by sending an email to info@fedfin.com .