Turf War on Systemic Risk Overlooks Key Issues

A January 28th Wall Street Journal article notes that two powerful US regulators, the SEC and the Fed, are in a "turf war" over asset managers. The article fails to highlight two critical issues.

First, the fight is not really about whether the asset management firms themselves are systemically important.

The key issue is whether their fund and other clients might be systemically important. The industry seems to keep missing this distinction.

Asset managers' clients might themselves be systemically important because of the potential impact of their aggregate losses on the economy. In this case, the regulatory dispute could spill over to managed accounts. In a recent report, the OFR already noted the need for more information about managed accounts, the types of assets they hold, their exposures and their leverage.

More likely, however, is that the Fed would argue that the largest clients may be systemically important because of the potential losses banks and other financial firms might sustain as a result of providing these clients with loans and clearing services. In this case, the Fed already has regulations and precedent on which to draw upon should it seek to regulate any risks inherent in the process of extending credit. In many respects, the Fed can act alone and without the SEC's consent with regard to these issues. More on this coming from us soon.

Let's close with the most important issue. The most important issue is determining what is right for the integrity and stability of the US financial system. Let's hope that a turf war between regulators does not get in the way of finding the truth.