Shadow Banking in the Euro Area: Risks and Vulnerabilities in the Investment Fund Sector

34 Pages Posted: 5 Jul 2016

See all articles by Nicola Doyle

Nicola Doyle

European Central Bank

Lieven Hermans

European Central Bank (ECB)

Philippe A.M. Molitor

European Central Bank (ECB)

Christian Weistroffer

European Central Bank (ECB)

Date Written: July 4, 2016

Abstract

This paper first highlights the structural features of shadow banking in the euro area, focusing 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.

Keywords: shadow banking, asset management, investment funds, financial stability, systemic risk, market liquidity, interconnectedness

JEL Classification: G01, G20, G23, G28

Suggested Citation

Doyle, Nicola and Hermans, Lieven and Molitor, Philippe A.M. and Weistroffer, Christian, Shadow Banking in the Euro Area: Risks and Vulnerabilities in the Investment Fund Sector (July 4, 2016). ECB Occasional Paper No. 174. Available at SSRN: https://ssrn.com/abstract=2804616

Nicola Doyle (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lieven Hermans

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Philippe A.M. Molitor

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christian Weistroffer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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