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Lennart Dekker

3 April 2023
MACROPRUDENTIAL BULLETIN - ARTICLE
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Abstract
This article analyses the financial stability risks of investment funds active in euro area commercial real estate (CRE) markets. It finds that real estate investment funds (REIFs) have grown significantly in the past decade, and have a large market footprint in several euro area countries where the outlook for CRE markets has deteriorated sharply. In addition, REIFs are exposed to liquidity risk when they offer frequent redemptions, which could affect the stability of CRE markets. REIFs should therefore be subject to a common and comprehensive policy framework to reduce the liquidity mismatch and risks to financial stability.
JEL Code
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
R33 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Nonagricultural and Nonresidential Real Estate Markets
16 November 2022
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2022
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Abstract
This box assesses the development of the liquidity mismatch for a broad sample of euro area open-ended bond funds. This mismatch arises if funds primarily invest in less liquid assets while at the same time offering their investors the option of short-term redemptions. In 2017 the Financial Stability Board (FSB) published policy recommendations to address structural vulnerabilities related to asset management activities, including liquidity mismatch. Our results suggest that the liquidity mismatch increased in the years up to the pandemic. In March 2020 many funds faced substantial redemption pressures, especially those with a relatively large structural liquidity mismatch, creating large fire-sale externalities. The increase in cash holdings after this shock indicates procyclicality in liquidity management strategies, suggesting that fund managers do not necessarily have the incentives to maintain sufficient liquidity buffers. Policies that aim to better align redemption terms with asset liquidity would help to enhance the resilience of the investment fund sector, as the liquidity mismatch is still prevalent and has not declined since the publication of the FSB policy recommendations in 2017.
JEL Code
G01 : Financial Economics→General→Financial Crises
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors