Global Risk, Non-Bank Financial Intermediation, and Emerging Market Vulnerabilities

Anusha Chari

Annual Review of Economics, 2023, vol. 15, issue 1, 549-572

Abstract: Over the last two decades, the unprecedented increase in non-bank financial intermediation, particularly the rise of open-end mutual funds and exchange-traded funds, accounts for nearly half of the external financing flows to emerging markets, exceeding cross-border lending by global banks. Evidence suggests that investment fund flows enhance risk sharing across borders and provide emerging markets access to more diverse forms of financing. However, a growing body of evidence also indicates that investment funds are inherently more vulnerable to liquidity and redemption risks during periods of global financial market stress, increasing the volatility of capital flows to emerging markets. Benchmark-driven investments, namely passive funds, appear particularly sensitive to global risk shocks, such as tightening US dollar funding conditions, compared to their active fund counterparts. The procyclicality of investment fund flows to emerging markets during times of global stress poses financial stability concerns, with implications for the role of macroprudential policy.

Keywords: non-bank financial intermediation; investment funds; international capital flows; emerging markets; benchmark investing; global risk shocks; tail risk (search for similar items in EconPapers)
JEL-codes: F21 F32 F36 F65 G11 G15 G23 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1146/annurev-economics-082222-074901

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