(Systemic) Risk-taking in the Euro Area Investment Fund Industry

Abstract

Abundant references to threats to financial stability likely posed by (systemic) risk-taking in the euro area investment fund industry in an era of historically persistent low interest rates have not been accompanied by robust supportive empirical evidence. This is the first study that assesses the effects of euro area conventional and unconventional monetary policy shocks on coherent systemic risk measures applied to the investment fund industry. This research finds evidence of systemic risk-taking notably in the forms of both contagion and increased vulnerability. It underpins the need to recognize and measure interconnectedness and contagion in systemic risk measurement. There is heterogeneity in the results as the investment focus is important for assessing investment funds’ contribution to systemic risk. Fund types most affected by significant systemic risk-taking are bond funds, mixed funds and real estate funds. Some evidence of heightened vulnerability in equity funds is also present. Overall, growth rates in assets managed tend to move in tandem with systemic risk-taking. Increases in leverage are part of the risk-taking mechanism under conventional monetary policy shocks. The main policy implication is that persistently accommodative monetary policy geared toward preserving price stability may face a trade-off with financial stability, making it necessary to coordinate monetary and macro-prudential policies.