By Simon Jessop and Huw Jones
LONDON (Reuters) - BlackRock, the world's biggest asset manager, says there is no need for a stress test of whether the mutual fund industry could repay a large number of panicking investors in the event of a fresh financial crisis.
Reduced market liquidity has spurred talk of conducting a test similar to those undertaken on the banking system.
The Bank of England is committed to testing the mutual fund sector's overall ability to withstand widespread redemptions, after a survey it conducted last year showed that funds were overly optimistic about their ability to cope.
But Barbara Novick, BlackRock's vice chairman, said the idea showed a misunderstanding of how markets work and any such test would not produce any meaningful results.
"I'm not sure what stress test people are even talking about when they say 'it will test all funds'. Really? What category? What does that look like? So, I can't even envision what that test would be or why it would be meaningful," she told Reuters.
Stress testing funds individually, as regulators have tested banks in Europe and the United States since the financial crisis, would be far better, said Novick, whose firm manages $4.6 trillion in assets on behalf of retail and institutional clients.
Novick said that if a particular security fell in price, certain types of mutual funds would step in as buyers, along with hedge funds and other market participants such as yield-hunting insurers and pension funds.
"If you just look at one piece of the eco-system, you're missing the dynamics of how the market works."
That was particularly important given mutual funds only held a small slice of the debt market, she wrote in a discussion paper released on Monday.
A total of $34 trillion of U.S. debt securities were held by non-mutual fund investors such as pension funds, charities, insurers and households, the report said, while open-ended mutual funds and exchange-traded funds held just $5 trillion.