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Asset managers, market liquidity and bank regulation

Author

Listed:
  • Iñaki Aldasoro
  • Wenqian Huang
  • Nikola Tarashev

Abstract

We challenge the argument that bank regulation amplifies the adverse effect of asset managers' fire sales. Evidence from investments by US money market funds over the past decade is consistent with asset managers herding for reputational reasons. In the presence of such herding, we derive that the asset management sector may take on too much liquidity risk from a social perspective. Importantly, asset managers' investment decisions today are affected by the spread that banks will charge for absorbing fire sales tomorrow. When regulation constrains banks' balance-sheet space, the resulting higher spread reins in asset managers' excessive risk-taking, thus raising social welfare.

Suggested Citation

  • Iñaki Aldasoro & Wenqian Huang & Nikola Tarashev, 2021. "Asset managers, market liquidity and bank regulation," BIS Working Papers 933, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:933
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    References listed on IDEAS

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    Cited by:

    1. Sirio Aramonte & Andreas Schrimpf & Hyun Song Shin, 2023. "Non-bank financial intermediaries and financial stability," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 7, pages 147-170, Edward Elgar Publishing.
    2. Fauvrelle, Thiago & Riedel, Max & Skrutkowski, Mathias, 2024. "Collateral pledgeability and asset manager portfolio choices during redemption waves," SAFE Working Paper Series 417, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    investment funds; herding; bank regulation; leverage ratio; social welfare;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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