Investment funds, shadow banking and systemic risk

Author:Elias Bengtsson
Position:ECB
Pages:60-73
SUMMARY

Purpose - This paper aims to consider the role of investment funds in the credit intermediation process and discuss various forms of systemic risk their involvement might give rise to. It concludes by drawing some conclusions on the policy challenges facing authorities charged with regulating shadow banking. Design/methodology/approach ... (see full summary)

 
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Investment funds, shadow
banking and systemic risk
Elias Bengtsson
ECB, Frankfurt, Germany
Abstract
Purpose – This paper aims to consider the role of investment funds in the credit intermediation
process and discuss various forms of systemic risk their involvement might give rise to. It concludes by
drawing some conclusions on the policy challenges facing authorities charged with regulating shadow
banking.
Design/methodology/approach – The paper is based on ndings from prior research and statistics.
Findings – On a general level, the paper shows that even though traditional investment funds and
hedge funds may be very different in terms of their investment strategies and business models, some of
them share several commonalities from a systemic risk perspective. More specically, it discusses how
instability in the funding prole of investment funds may threaten their ability to substitute banks’
maturity and liquidity transformation; that their potential funding liquidity shortages, asset
reallocations and leverage may contribute to procyclicality in credit and market runs on the systemic
money and short-term credit markets; and that insufcient risk separation may elude managerial and
supervisory oversight, and force banks to reduce or interrupt credit intermediation.
Research limitations/implications – The paper points to the lack of timely and comprehensive
data for uncovering the stages and entities involved in shadow banking. Without sufcient data, the
task of policy bodies, regulators or macroprudential authorities to fully grasp shadow banking and its
contribution to systemic risk is daunting.
Originality/value – The paper represents (to the author’ knowledge) the rst analysis of the role of
investments in shadow banking.
Keywords Investment funds, Systemic risk, Shadow banking
Paper type Viewpoint
1. Introduction
Credit intermediation – accepting deposits or other short-term funding from surplus
agents and lending it on to corporations, households and public bodies with borrowing
needs – is typically associated with banks. Traditionally credit intermediation has been
provided through a business model where banks act as single intermediaries, managing
all stages of the credit intermediation process. The role of other nancial intermediaries,
such as investment funds, has been limited. However, in recent decades, the
provisioning of credit has become increasingly segmented, with the various stages of
the intermediation process supplied by a variety of nancial entities, specializing on one
particular or several stages in intermediation chain. The potential benets from such
segmentation are substantial. It allows for more efcient intermediation, provides
opportunities to diversify risk, improves pricing and allocation of risk as well as avoids
its concentration in (typically a few large) banks. It also increases supply of funding and
liquidity, thereby lowering costs for banks, their clients and the overall economy (Dufe,
2008;Bengtsson, 2014).
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
24,1
60
Journalof Financial Regulation
andCompliance
Vol.24 No. 1, 2016
pp.60-73
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2014-0051

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