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Shadow banking in the euro area: risks and vulnerabilities in the investment fund sector

Philippe Molitor, Nicola Doyle, Lieven Hermans and Christian Weistroffer

No 174, Occasional Paper Series from European Central Bank

Abstract: This paper first highlights the structural features of shadow banking in the euro area, focussing on investment funds. It then discusses the potential systemic risks that the recent expansion of the investment fund sector presents. While investment funds provide important intermediation services to the real sector, including market and liquidity risk-sharing and the bridging of information gaps, their rapid expansion may present systemic risks that need to be detected, monitored and managed. In particular, the risk of fund outflows and the possible negative impacts on the wider financial system have risen due to the rapid expansion of the investment fund sector, its growing involvement in capital markets, its use of synthetic leverage, and the inherent and growing maturity and liquidity mismatch arising from the demandable nature of fund share investments. While available data suggest that vulnerabilities within the investment fund sector are growing and links to the wider financial system and real economy have strengthened, data limitations prevent drawing a definitive conclusion on the sectors' contribution to systemic risk. JEL Classification: G01, G20, G23, G28

Keywords: "shadow banking; asset management; Financial Stability; interconnectedness"; investment funds; market liquidity; systemic risk (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-rmg
Note: 521888
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