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Alex Brazier, the BoE's executive director for
financial stability, said it was striking that the more illiquid
or difficult to trade the assets in a fund were, the more
aggressively its investors withdraw their funds as prices of the
assets fall.
"When a fund holds assets traded almost instantly on exchange –
like blue-chip equities – investors tend to sit on their hands,"
Brazier said in a speech.
"Liquidity isn't costless," Brazier he added.
Last week in Britain fund manager Neil Woodford suspended his
flagship equity fund. Some of the companies it has invested in
are illiquid and listed on an exchange in Guernsey.
Brazier did not name Woodford in his speech.
"Of course, redemptions can be suspended – funds can be gated –
to limit the selling pressure. But such measures are a
double-edged sword," Brazier said.
"They can allow time for an orderly re-structuring of a fund,
avoiding unnecessary fire sale pressure, but the expectation
that such measures could be imposed tomorrow can create an
incentive to be at the front of the redemption queue today,"
Brazier added.
Britain's Financial Conduct Authority is finalizing rules for
funds investing in illiquid assets, but it was also a global
issue, Brazier said.
"Macroprudential authorities across the world will need to
review new global asset management rules. An assessment is
needed of whether they will be effective in dampening any
restriction to the supply of finance during economic downturns,"
Brazier said.
He said Britain's big current account deficit represented its
biggest underlying economic vulnerability, recalling how BoE
Governor Mark Carney has previously warned of the reliance on
"the kindness of strangers".
(Reporting by Huw Jones and William Schomberg; Editing by
Kirsten Donovan)
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