Bank of England Governor Mark Carney, who is also head of the Financial Stability Board (FSB) group of regulators, said assets managed by investment funds were now equivalent to almost 90 percent of the global economy.

Carney said the growth of asset management brought welcome diversity to the financial system.

"However, there must also be a focus, as there has been with banks, on the systemic risks it could create," he said in a speech on the sidelines of meetings at the International Monetary Fund in Washington.

"The biggest risks arise from combining high levels of leverage with holdings of illiquid assets and commitments to provide liquidity at short notice," he said.

"In the current environment, those types of activities need careful monitoring, and possibly a deliberate policy response."

Carney's comments echoed those made by BoE Deputy Governor Jon Cunliffe earlier this year who said financial markets appeared to have underpriced the risk of investments proving illiquid.

Major asset managers include BlackRock (>> BlackRock, Inc.), Legal & General (>> Legal & General Group Plc), Prudential's (>> Prudential plc) M&G unit and State Street (>> State Street Corporation).

Reuters reported in August that asset managers may face tougher scrutiny after a draft FSB proposal to regulate the sector faced intense lobbying from the industry.

Global regulators are set to propose in the coming months a revised, "hybrid" approach that combines supervision of funds with "tailored" steps to limit potential disruption their response to rocky markets could cause, a top regulator has said.

Asset managers say they did not trigger the financial crisis and should not be regulated to the same extent as banks.

WATERSHED SUMMIT

The FSB has spearheaded an intensive phase of rule-making to make banks safer after the 2007-09 financial crisis which forced taxpayers to bail out lenders.

Carney said this work to end "too big to fail" banks, meaning new safeguards to allow banks to fail without sparking global markets mayhem, will reach a watershed at a summit of leaders of the Group of 20 economies to be held in November.

He expects the summit to endorse a proposal requiring the world's biggest banks to hold an extra buffer of bonds for converting into equity if they go bust, thereby shielding taxpayers from further bailouts.

Carney said that after November, the application of all the regulation approved since the crisis and a focus on new potential vulnerabilities like asset managers, will form a new phase in regulatory work.

"Policymakers must now begin to look beyond how they will reform the core of the system to how they will regulate and supervise it," he said.

(Writing by William Schomberg and Huw Jones, editing by David Evans)