by Peter J. Wallison
American Enterprise Institute
January 16, 2014
In a September 2013 report, the Office of Financial Research (OFR), a US Treasury agency set up by the Dodd-Frank Act, suggested that the asset management industry could be a future source of systemic risk. The OFR assumed that losses in collectively managed funds of various kinds—including mutual funds, hedge funds, and pension funds—could produce a systemic event similar to the 2008 mortgage market crash. If so, that would be a basis for designating investment managers and the funds they manage as systemically important financial institutions (SIFIs). However, the OFR missed a vital difference between financial institutions such as banks and entities such as managed funds. Unlike banks, losses in collective funds of various kinds flow through immediately to their investors and thus are spread among and absorbed by millions of investors and trillions of dollars in equity capital. Because of this difference, the chances that an asset manager could trigger a systemic event is vanishingly small. The Federal Stability Oversight Council (FSOC) should spend its time elsewhere.



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