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Investment funds, shadow banking and systemic risk

Author

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  • Elias Bengtsson

Abstract

Purpose - – This paper aims to consider the role of investment funds in the credit intermediation process and discuss various forms of systemic risk their involvement might give rise to. It concludes by drawing some conclusions on the policy challenges facing authorities charged with regulating shadow banking. Design/methodology/approach - – The paper is based on findings from prior research and statistics. Findings - – On a general level, the paper shows that even though traditional investment funds and hedge funds may be very different in terms of their investment strategies and business models, some of them share several commonalities from a systemic risk perspective. More specifically, it discusses how instability in the funding profile of investment funds may threaten their ability to substitute banks’ maturity and liquidity transformation; that their potential funding liquidity shortages, asset reallocations and leverage may contribute to procyclicality in credit and market runs on the systemic money and short-term credit markets; and that insufficient risk separation may elude managerial and supervisory oversight, and force banks to reduce or interrupt credit intermediation. Research limitations/implications - – The paper points to the lack of timely and comprehensive data for uncovering the stages and entities involved in shadow banking. Without sufficient data, the task of policy bodies, regulators or macroprudential authorities to fully grasp shadow banking and its contribution to systemic risk is daunting. Originality/value - – The paper represents (to the author’ knowledge) the first analysis of the role of investments in shadow banking.

Suggested Citation

  • Elias Bengtsson, 2016. "Investment funds, shadow banking and systemic risk," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 24(1), pages 60-73, February.
    • Handle: RePEc:eme:jfrcpp:v:24:y:2016:i:1:p:60-73
    DOI: 10.1108/JFRC-12-2014-0051
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    Citations

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    Cited by:

    1. van der Veer, Koen & Levels, Anouk & Lambert, Claudia & Weistroffer, Christian & Chaudron, Raymond & van Stralen, René de Sousa & Molestina Vivar, Luis, 2017. "Developing macroprudential policy for alternative investment funds," Occasional Paper Series 202, European Central Bank.
    2. Markus K. Brunnermeier & Patrick Cheridito, 2019. "Measuring and Allocating Systemic Risk," Risks, MDPI, vol. 7(2), pages 1-19, April.
    3. Ridoy Deb Nath & Mohammad Ashraful Ferdous Chowdhury, 2021. "Shadow banking: a bibliometric and content analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-29, December.
    4. Juan José Durán Herrera & María José García López & Carmen Avilés Palacios & Oriol Amat, 2016. "Is there a difference in financing efficiency? Conventional banks versus ethical banks," Economics Working Papers 1512, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    6. Bengtsson, Elias, 2020. "Macroprudential policy in the EU: A political economy perspective," Global Finance Journal, Elsevier, vol. 46(C).
    7. Nadal De Simone, Francisco, 2021. "Measuring the deadly embrace: Systemic and sovereign risks," Research in International Business and Finance, Elsevier, vol. 56(C).

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