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Non-bank Financial Institutions at the Ground Zero of Next Crisis

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  • Xing, Victor

Abstract

• Non-bank financial institutions (“shadow banks”) filled the funding gap following banks’ retreat in the wake of the post-crisis regulatory tightening and amid pressure to bolster returns in response to central banks’ low rates policy • “Shadow banks” such as investment managers, insurance companies and pension funds reacted to policy-induced volatility suppression by moving up the risk ladder: longer term bonds, high yield debt, equities, and direct lending • Prolonged volatility dampening induced investors to forgo volatility hedging and fueled the growth of passive funds, and rising concentration of “flighty asset” in passive funds increased probability for a “shadow bank run” • Non-banks are becoming increasingly reliant on monetary authorities to continue volatility suppression, and many “reach for yield” and risk-parity strategies hinge on prolonged policy accommodation to ward against redemption • Looming increase in Fed balance sheet reinvestment cap and ECB QE taper will threaten years of non-bank risk accumulation made viable by low volatility, and a decline in asset prices will likely trigger a systemic VaR shock

Suggested Citation

  • Xing, Victor, 2017. "Non-bank Financial Institutions at the Ground Zero of Next Crisis," MPRA Paper 83077, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:83077
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    File URL: https://mpra.ub.uni-muenchen.de/83077/1/MPRA_paper_83077.pdf
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    More about this item

    Keywords

    Shadow banks; systemic risk; financial risk contagion; volatility; non-bank financial institutions;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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