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Pierce Daly

22 November 2023
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2023
Details
Abstract
Recent changes in the macroeconomic and financial landscape underscore the need to reassess how liquidity vulnerabilities have evolved for euro area open-ended bond funds. Bond funds’ HQLA levels have declined since 2019, indicating greater liquidity mismatch than prior to the pandemic. Over the same period, their redemption coverage for a severe outflow scenario has also deteriorated. In combination, this demonstrates that large-scale redemptions could lead to stress within the bond fund sector and, in turn, contribute to the procyclical sell-off of less liquid assets that could have negative repercussions for underlying markets. Results highlight the need to better align asset liquidity with fund redemption terms to address structural liquidity mismatch in open-ended funds.
JEL Code
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
3 April 2023
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 20
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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