Non-bank Financial Institutions at the Ground Zero of Next Crisis

Victor Xing

MPRA Paper from University Library of Munich, Germany

Abstract: • Non-bank financial institutions (“shadow banks”) filled the funding gap following banks’ retreat in the wake of the post-crisis regulatory tightening and amid pressure to bolster returns in response to central banks’ low rates policy • “Shadow banks” such as investment managers, insurance companies and pension funds reacted to policy-induced volatility suppression by moving up the risk ladder: longer term bonds, high yield debt, equities, and direct lending • Prolonged volatility dampening induced investors to forgo volatility hedging and fueled the growth of passive funds, and rising concentration of “flighty asset” in passive funds increased probability for a “shadow bank run” • Non-banks are becoming increasingly reliant on monetary authorities to continue volatility suppression, and many “reach for yield” and risk-parity strategies hinge on prolonged policy accommodation to ward against redemption • Looming increase in Fed balance sheet reinvestment cap and ECB QE taper will threaten years of non-bank risk accumulation made viable by low volatility, and a decline in asset prices will likely trigger a systemic VaR shock

Keywords: Shadow banks; systemic risk; financial risk contagion; volatility; non-bank financial institutions (search for similar items in EconPapers)
JEL-codes: E52 G12 G22 G23 (search for similar items in EconPapers)
Date: 2017-11-26
New Economics Papers: this item is included in nep-mac and nep-rmg
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