Proposals to improve investment funds ‘resilience
The International Monetary Fund (IMF) describes the role that investment funds play in financial crises and in global financial stability. The IMF proposes concrete measures to strengthen liquidity risk management to deal with client’s daily liquidity needs and mitigate the negative effects of liquidity tensions derived from fire-sale assets pro-cyclical dynamics.
The article´s key highlights would be the following:
- Prominent role of investment funds in the economy and in the global financial stability: According to the report around 50% of the world's financial assets are currently managed by non-bank institutions. Investment funds are key to explain that growth that has become an essential engine for prosperity of many corporates and households, but also a source of cross-border risk transfer in times of crisis.
- Liquidity risks in times of crisis: The search for higher returns in a low interest rate environment has led a part of these funds to invest in assets with higher risk and less liquidity (higher yield private debt or real estate assets). In times of adverse shocks (such as the pandemic crisis), clients ask for liquidity forcing funds to sell invested assets. Asset fire-sales generate drops in market values and capital outflows from companies and emerging countries, putting under pressure their promise of liquidity and amplifying the effects of the crisis.
- The IMF proposes concrete measures to safeguard global financial stability boosting the resilience of investment funds. For example:
- To disincentivize the early sales of investment fund´s shares when adverse shocks occur, by decreasing the value of selling fund´s shares early on in favor of investors who do not sell, thus avoiding sell-off episodes.
- To create liquidity tools, such as increasing counter-cyclical and liquidity buffers, or to allow to limit the sale of a part of the position, or to repay with other liquid assets, such as treasury bonds, instead of cash.
- These measures could be applied consecutively or in combination depending on the severity of the crisis.
Filter results
According to @IMF, the capacity of fiscal and monetary policy to mitigate financial stability risks is more limited today than it was during much of the past two decades, given high debt levels and inflation in many jurisdictions.
According to Ramón Casilda, “it is no longer just a matter of Spanish capital investing in Latin America, but also of Latin American capital using Spain as a European base,” reinforcing a more balanced transatlantic economic space.
According to José Carlos Díez, Professor of Economics at the University of Alcalá, Spanish households have access to some of the cheapest mortgages in Europe, with interest rates below both Euribor and long-term government bond yields.
According to the IEE, Spain's business tax burden exceeds the European Union average, both as a share of total tax revenues and as a percentage of GDP.
AEB, CECA and UNACC propose measures to increase banks' lending capacity by more than €2 trillion in the euro area, including over €250 billion in Spain, providing additional resources to strengthen banks and finance new investment.
According to Boston Consulting Group, regulation brought in after the GFC strengthened the financial sector’s resilience but institutionalized bias towards removing all risk over economic growth.
According to Ramón Casilda, the EU–Mercosur agreement will generate annual tariff savings of around €4 billion, which is significantly higher than the savings expected under the agreements with Canada and Japan.
Economist José Carlos Díez notes that Spain’s banking sector has an excess of deposits and sufficient liquidity to meet the credit demand of companies and households, and does so at the lowest interest rates in Europe, according to the ECB.
According to CEPS, regulatory and supervisory complexity acts as a structural constraint on integration, investment and market depth, with costs that weigh most heavily on smaller institutions, new entrants and cross-border business models.
According to the ECB, an efficient, secure and integrated payment system would strengthen the international role of the euro and deliver benefits such as lower financing costs, reduced exposure to exchange rate fluctuations and greater protection against sanctions.
According to the IEA one key debate in the EU on financial regulation simplification is whether to explicitly include competitiveness, efficiency or contribution to growth as objectives of the regulatory agencies, following the UK example.
According to IE University’s Center for the Governance of Change, deeper and more integrated financial markets would strengthen the euro’s global role. This requires, among other elements, resilient and interoperable payment systems and completing the banking union.