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Oversight of large asset managers in the EU suffers from “supervisory blind spots” due to a patchwork of national authorities, European Central Bank economists have warned.

Supervision of the bloc’s biggest money managers is “nationally fragmented” yet their clients and investment activities are spread across the region and “risks do not stop at borders”, a team of ECB researchers said in a blog post published on Friday.

Most funds, including many by BlackRock, Amundi and DWS, are domiciled in either Luxembourg or Ireland due to the countries’ historically favourable institutional framework for the industry and are overseen by their national supervisors.

The economists stopped short of calling for centralised oversight but suggested that the Paris-based European Securities and Markets Authority (Esma) should set up and co-ordinate “supervisory colleges” for the 10 to 15 largest managers, in which “relevant” national authorities promote “a European approach in their supervision”.

Such a move could “help eliminate supervisory blind spots and reduce fragmentation”, the authors said.

Technically the blog post only represents the personal views of its authors, led by Michael Wedow, deputy head of the ECB’s financial regulation division, and not the ECB’s official position.

However, they state that the EU’s central banks see “merit in a more integrated supervision of asset managers and funds with significant European cross-border activities”. In December, the European Commission disclosed plans for “enhancing” Esma’s “co-ordination role for the asset management sector”.

The European Fund and Asset Management Association last year rejected the idea of centralised supervision, arguing that “the current supervisory model remains the most suitable”.

Assets under management at EU firms have nearly doubled to more than €20tn over the past decade, as the fund management industry has expanded three times faster than the wider banking sector, according to the blog.

“As the sector is likely to have an even bigger footprint in the years to come . . . the time is ripe for assessing whether the supervisory architecture is fit for purpose,” the blog reads.

Under the current set-up, the national authorities in charge of supervision “may be more likely to overlook potential spillover effects to other countries”, the researchers said. “Risks can materialise far from a fund’s home jurisdiction and beyond the effective reach of its national supervisor.”

Countries most exposed to potential stress in the investment fund sector are often not regulating the industry and “lack the ability to pre-empt emerging risks”, they warned.

They pointed to the market meltdown in March 2020, at the start of the Covid-19 pandemic, and argued that “central banks were instrumental in containing stress in the investment fund sector” at the time, adding that such interventions create the risk of moral hazard at the expense of taxpayers and justified “integrated” oversight. 

Apart from potential spillover risks, the authors pointed to the political ambition of creating a fully integrated pan-European capital market, dubbed the savings and investments union. Pan-European supervision of the bloc’s largest asset managers could “foster cross-border financing” as it may help to “remove barriers to cross-border fund distribution”, the economists said.

This piece has been updated to clarify Esma is based in Paris