48 Pages Posted: 13 Feb 2019 Last revised: 23 Feb 2020
Date Written: January 12, 2019
Investment funds increasingly substitute for banks in supplying credit to the real economy. Regulators have paid considerable attention to the potential financial stability risks of this migration to nonbank credit. This Article, however, argues that certain private investment funds (and the asset management institutions that house them) can enhance financial stability by promoting economic resilience. Specifically, it argues that certain private funds are incentivized and structured to supply the economy with a countercyclical source of credit — turning on their credit spigots precisely when banks are likely to turn theirs off. In doing so, these private funds have the potential to keep the economy buoyant in periods of economic downturn or distress.
Drawing from that descriptive claim, the Article presents a normative argument that legal and regulatory frameworks should facilitate the flow of capital into the nonbank market for credit, in order to augment the supply of countercyclical credit. In particular, the Article urges some departure from the current securities law framework by suggesting that retail investors — not only sophisticated and accredited investors — should be eligible to invest in private debt funds. It also provides a blueprint for how relevant law and regulation might be re-designed to safely allow for this new form of retail investing in private funds.
Keywords: financial regulation, financial stability, investment funds, debt cycle
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