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Bank of England Governor warns of emerging market 'fire sale' triggered by asset management

Bank Of England Governor Mark Carney has issued a strongly worded warning about the rise of the asset management industry - Bloomberg
Bank Of England Governor Mark Carney has issued a strongly worded warning about the rise of the asset management industry - Bloomberg

A “potentially major new vulnerability” now faces the world economy which could trigger a “fire sale” across emerging markets, Mark Carney, the Governor of the Bank of England, warned yesterday.

Mr Carney, who also chairs the Basel-based Financial Stability Board watchdog, told an audience in New York that asset managers expansion into emerging markets  – from $50 trillion to $80 trillion over the past decade – could increase the risk of capital flight from them.

He highlighted that more than $30 trillion of assets were invested in illiquid assets – that could prove hard for the funds to sell quickly – while the funds’ investors could in effect demand to cash in their holdings when they want.

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Urgent steps were required by authorities in order to avoid these funds triggering “fire sales” and “contagion” effects across emerging markets, such as those seen in Asian and Latin American economies in the 1990s.

The Governor held this up as an example of “the lie that markets always clear”, one of the “three lies of finance that helped cause the global financial crisis”.

“Markets only clear in textbooks,” he added. “In reality, people are irrational, economies are imperfect and nature itself is unknowable.”

Mr Carney also heavily criticised the EU Commission for throwing the fate of some £100 trillion financial contracts into legal doubt. The Bank has repeatedly called for Brussels to reciprocate its offer of a temporary permissions regime for EU based financial companies to secure these valuable derivatives contracts.

He also reiterated concerns raised by the growth in the leveraged loan market. This splurge in risky corporate debt has raised echoes of the 2008 financial crisis with growth in this lending outstripping the notorious subprime mortgage bubble which preceded it.

The Governor said the explosion in Chinese shadow banking, an issue also raised in recent years by the global lender of last resort, the International Monetary Fund, was a risky economic “fault line”.