BOE Issues Fresh Warning on Risk From Funds With Illiquid Assets

(Bloomberg) -- The Bank of England issued a new warning about funds investing in illiquid assets, saying the problem could pose a bigger threat to the financial system if it spreads.

The comments from Deputy Governor Jon Cunliffe come a week after Mark Carney, the BOE's governor, said that funds with such investments and unlimited withdrawals are “built on a lie.” Cunliffe warned of a risk of “contagian” if the problems become more widespread.

The backdrop includes a panic at H2O Asset Management, where clients began to pull money last month over concerns about illiquid holdings. That added to growing concern about funds holding hard-to-sell assets while allowing clients to pull their money on a daily basis. Star stock picker Neil Woodford was forced to freeze withdrawals from his flagship fund earlier in June.

In a speech in Lisbon Wednesday, Cunliffe noted recent “idiosyncratic” examples of liquidity risk, saying they “have not given rise to financial stability risks.” He didn't mention any funds by name.

“But if we saw this happen on a wider front, if for example investors lost confidence in a less liquid asset class, there is a risk of redemption pressures that could not easily be met and consequently contagion and firesales that could damage the financial system,” he said. “These are international markets so we need to work internationally to assess these risks and any structural remedies that might be warranted.”

To contact the reporter on this story: Fergal O'Brien in Zurich at fobrien@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, David Goodman, Brian Swint

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