Gabriel Makhlouf calls for an overhaul of fund rules to prevent panics

The Central Bank of Ireland (CBI) governor has called for tighter regulation of “hidden leverage” in the fund sector to prevent major financial shocks caused by over-borrowing.

Gabriel Makhlouf told a conference on Wednesday morning that “the sector is too big to ignore” and that unlimited leverage for funds poses a risk to financial stability that needs to be managed.

“Traditionally, regulation of mutual funds has been primarily about developing and enforcing investor protection regulations,” he said, speaking at the CBI’s Financial Systems Conference in Dublin.

“But we have to learn from history. The lessons of the global financial crisis, the March 2020 Covid-induced market shock and the UK’s recent LDI issuance are clear.

“There are clearly hidden levers, interconnections and delivery channels that we do not yet fully understand, and vulnerabilities that are building in the non-banking sector.”

Ireland has the third largest fund sector in the world with 10,000 companies holding assets of €5.6 trillion and is therefore an important forum for new regulation of funds in Europe.

The Irish financial system here is heavily geared towards the non-bank sector, made up of mutual funds, money market funds and special purpose vehicles used for global investment.

Mr Makhlouf said regulators need to look at the sector as a whole rather than individual funds and companies to protect the financial system in general and protect consumers from systemic problems.

“Consumer and investor protection is built on the existence of a stable financial system, and regulators need to be aware of the bigger picture and resist the temptation to focus on narrower and perhaps simpler ways of delivering that protection,” he said.

“Dealing with systemic risk requires a macroprudential perspective that focuses on the collective action of fund cohorts, not on idiosyncratic risk management issues at individual funds.”

The central bank plans to introduce credit limits for real estate funds operating in the domestic economy.

Regulators are understood to be considering a rule preventing such funds from borrowing more than 50 percent of their total asset value.

The CBI held a consultation on the proposed changes a year ago and a decision on the final policy is expected shortly. Gabriel Makhlouf calls for an overhaul of fund rules to prevent panics

Fry Electronics Team

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