Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269102 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2695
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
The investment fund sector, the largest component of the non-bank financial system, is growing rapidly and the economy is becoming more reliant on investment fund financial intermediation. This paper builds a dynamic stochastic general equilibrium model with banks and investment funds. Banks grant loans and issue liquid deposits, which are valuable to households. Funds invest in corporate bonds and may hold liquidity in the form of bank deposits to meet investor redemption requests. Without regulation, funds hold insufficient deposits and must sell bonds when hit by large redemptions. Bond liquidation is costly and eventually reduces investment funds' intermediation capacity. Even when accounting for side effects due to a reduction of deposits held by households, a macroprudential liquidity requirement improves welfare by reducing bond liquidation and by increasing the economy's resilience to financial shocks akin to March 2020.
Subjects: 
Non-Bank Financial Intermediation
Macroprudential Policy
Liquidity Regulation
JEL: 
E44
G18
G23
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5279-8
Document Type: 
Working Paper

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