By Huw Jones
LONDON, June 29 (Reuters) - While banks are dumping riskyassets as regulation bites, asset managers are plugging thefunding gap and using their growing clout in ways that couldharm markets, the Bank for International Settlements says.
Nearly six years after the financial crisis forced taxpayersto bail out lenders, the global forum for central banks said inits annual report on Sunday that the financial system is at acrossroads.
Banks are reconfiguring their business by ditching riskyassets to limit how much extra capital they must hold undertougher new rules aimed at avoiding bailouts in future crises.
"In the advanced economies most affected by the crisis, bankcredit to corporates has ceded ground to market-basedfinancing," the BIS report said.
The asset management sector's growth to more than $60trillion under management has coincided with an increase in themarket share of the biggest players, with the top 20 managersrepresenting over a quarter of the sector.
The global Financial Stability Board (FSB), based in thesame building as the BIS in Basel, Switzerland, is facingopposition from big asset managers to its plans to imposetougher supervision on them.
The BIS acknowledges benefits in market-based finance.
The European Union is encouraging funds to put money intoinfrastructure as about 70 percent of funding for the economy inthe 28-country bloc comes from banks.
But the BIS cautioned that asset managers can hurt marketdynamics and funding costs.
"Portfolio managers are evaluated on the basis of short-termperformance, and revenues are linked to fluctuations in customerfund flows," the report said.
"Single firms in charge of large asset portfolios may attimes exert disproportionate influence on market dynamics.Another concern arising from concentration is that operationalor legal problems at a large asset management company may havedisproportionate systemic effects," the report said.
RATIO DOUBTS
The BIS said there are still doubts over the core capitalratios - the main measure of a bank's health - being publishedby lenders. There are variations in how banks calculate ratiosby assigning risk weightings to their assets.
"The combined effect of these varying practices suggest thatthere is scope for inconsistency in risk assessments and hencein regulatory ratios," the report said.
A key driver of the variations is in the way banks set asidecapital, if at all, to cover possible default on the sovereigndebt they hold.
But the report stops short of backing some policymakers whowant an end to the "zero" risk weighting assigned to more thanhalf of the sovereign debt held by banks. The need to bail outseveral EU countries showed that sovereign debt can lose itsvalue sharply.
The BIS also stops short of backing the calls from hawkishregulators in Britain and the United States who want radicalchanges to the models big banks use to assign risk weightings.
The report said models used by banks permit a "natural andwelcome diversity of risk assessments among banks".
More objective measurement of underlying risks was needed,along with better supervisory safeguards on the use of models,the BIS report said.
Introducing a single regulatory model, such as a unique setof risk weights that all banks must use, could encourage riskconcentration, the report added.
(Reporting by Huw Jones; Editing by Ruth Pitchford)