John Cunliffe, deputy governor, financial stability at the Bank of England, warned that funds could face liquidity pressures in their hunt for yield.
Speaking at an Association for Financial Markets in Europe event, Cunliffe said: “With the search for yield, [funds] have become active in more illiquid and volatile markets while still – in the majority of cases – promising daily liquidity to their investors.”
The hunt for yield has seen investors increasing allocations to higher yielding bonds that are less easy to sell at a time when there are heavy redemptions.
Cunliffe, who is also a member of the Bank’s monetary policy committee, questioned whether it was possible for individual funds to cope with redemption pressures and whether they posed risks to the wider system should they have to sell assets at a knock-down price.
Cunliffe also said that there may need to be a stronger link between a fund’s promise of liquidity to its investors and the nature of the assets in which it invests.
The Financial Stability Board and International Organization of Securities Commissions are moving forward with work to address these broader, potentially systemic risks, according to Cunliffe.
He ended his speech with a reference to the UK’s decision to leave the EU. He said whatever the outcome, the Bank will continue its role of protecting financial stability.
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