FINANCE: Funds such as those providing debt to the property industry pose a systemic risk to the global economy and should be regulated more heavily, the International Monetary Fund has warned.
This is despite the funds’ function as a “spare tyre” to the banking sector, the IMF said in its Global Financial Stability Report, published this week.
The report highlighted a lack of supervision, allowing fund managers to invest heavily in specific sectors untracked, which affects asset prices and risks major runs on assets when one or more funds decide to change direction.
The report also found that it was not necessarily the size of funds that posed a systemic risk, but the type of investments made, particularly in less liquid assets such as real estate and debt.
Shortly after the financial crisis fund managers raised debt funds in order to lend to the real estate industry and fill the space banks vacated. But over the past year, with banks now becoming more active, funds are moving further up the risk curve in terms of the leverage provided and product they are lending on in order to meet return targets.
Peter Cosmetatos, chief executive of CRE Finance Council, said: “The biggest single driver for risk build-up in this sector is not incentive misalignment or structural features of the investment funds sector, but QE and monetary policy, which are forcing a lot of traditionally cautious capital to be more creative in the search for returns.”
