A slew of U.S. regulators warned banks, including their senior management and boards of directors, of the pitfalls of providing financial support to faltering mutual fund firms they advise, in a joint policy statement released on Monday.
"The agencies have concluded that recent market developments, including market volatility, the continued low interest rate environment, and operational and corporate governance weaknesses, warrant the issuance of this guidance," the agencies said. The statement was released by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of Thrift Supervision.
Although banks are not required to provide financial support to the funds they advise, they sometimes do for reasons of reputation risk and liability mitigation, the agencies said. This includes credit extensions, cash infusions, asset purchases and acquisition of fund shares all perfectly legal in some instances.
However, the agencies expressed concerns about situations in which emergency liquidity needs might prompt banks to support their advised funds in a way that is cause for legal concern. The recommendations are designed so that banks will not inappropriately place their resources and reputation at risk for the benefit of the funds investors and creditors or violate laws, among other goals.
Among the controls recommended are alternative sources of emergency support from a parent holding company, instituting effective policies for identifying potential circumstances triggering the need for financial support and the process for obtaining such support.