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Economic Bulletin Issue 5, 2021

Economic Bulletin Issue 5, 2021
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Financial Stability Review, May 2021

Financial Stability Review, May 2021 Foreword This is the third issue of the Financial Stability Review (FSR) prepared in the context of the coronavirus COVID-19 pandemic, with many euro area countries having faced a third wave of infections. As a result, a vast number of firms – particularly those in the services, leisure and travel sectors – still cannot operate normally, and the economy is still reliant upon policy support to prevent widespread unemployment, corporate insolvencies and economic contraction. The human and economic costs of the pandemic continue to accrue. That said, vaccination programmes are progressing and offering a route out of the pandemic. Financial markets have been driven by expectations of an upswing, exemplified by a striking rally in global equity markets. We are optimistic that financial and economic conditions will bounce back. There is, however, a reality that the pandemic will leave a legacy of higher debt and weaker balance sheets, which – i

Investment funds procyclical selling and cash hoarding: a case for strengthening regulation from a macroprudential perspective

Date Prepared by Katharina Cera, Linda Fache Rousová, Angelica Ghiselli, Christoph Kaufmann and Sean O’Sullivan During the March 2020 market turmoil, investment funds shed assets on a large scale – but was this selling commensurate with the outflows they faced or was it much larger? This box finds evidence of the latter, highlighting that the less regulated non-UCITS funds tended to engage in more procyclical selling and cash hoarding than UCITS funds. [1] While it can be rational for fund managers individually to sell assets in excess of current outflows when uncertainty about future redemptions is high, such cash hoarding may be detrimental to the stability of financial markets from a macroprudential perspective.

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