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Asset managers, market liquidity and bank regulation

Iñaki Aldasoro, Wenqian Huang and Nikola Tarashev ()

No 933, BIS Working Papers from Bank for International Settlements

Abstract: We challenge the argument that bank regulation amplifies the adverse effect of asset managers' fire sales. Evidence from investments by US money market funds over the past decade is consistent with asset managers herding for reputational reasons. In the presence of such herding, we derive that the asset management sector may take on too much liquidity risk from a social perspective. Importantly, asset managers' investment decisions today are affected by the spread that banks will charge for absorbing fire sales tomorrow. When regulation constrains banks' balance-sheet space, the resulting higher spread reins in asset managers' excessive risk-taking, thus raising social welfare.

Keywords: investment funds; herding; bank regulation; leverage ratio; social welfare (search for similar items in EconPapers)
JEL-codes: D62 G21 G23 G28 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021-03
New Economics Papers: this item is included in nep-ban and nep-cba
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Handle: RePEc:bis:biswps:933