Template-Type: ReDIF-Paper 1.0
Author-Name: Iñaki Aldasoro
Author-X-Name-First: Iñaki
Author-X-Name-Last: Aldasoro
Author-Name: Wenqian Huang
Author-X-Name-First: Wenqian
Author-X-Name-Last: Huang
Author-Name: Nikola Tarashev
Author-X-Name-First: Nikola
Author-X-Name-Last: Tarashev
Title: Asset managers, market liquidity and bank regulation
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.
Length: 42 pages
Creation-Date: 2021-03
File-URL: https://www.bis.org/publ/work933.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work933.htm
File-Format: text/html
Number: 933
Keywords: investment funds, herding, bank regulation, leverage ratio, social welfare
Classification-JEL: G21, G23, G28, D62
Handle: RePEc:bis:biswps:933