With a federal judge trying to decide if one of the largest financial services companies in the world qualifies as too big to fail—or, at least, whether it can be so deemed at a regulator’s whim—now might seem a strange time for other regulators to be spitballing about what else might be slapped with the dreaded 'systemically important financial institution' tag, especially about something that just about everyone agrees is not systemically important. But spitballing is what economists do, and so if you are a large asset manager, allow those at the New York Fed to scare the bejesus out of you.
According to conventional wisdom, an open-ended investment fund that has a floating net asset value (NAV) and no leverage will never experience a run and hence never have to fire-sell assets. In that view, a decline in the value of the fund’s assets will just lead to a commensurate and automatic decline in the fund’s equity—end of story. In this post, we argue that the conventional wisdom is incomplete….
Our macroprudential stress test reveals that mutual funds can, in fact, be subject to a “run”—despite the fact that they have no significant leverage and a floating NAV. In addition, the test shows that such a run can produce significant negative spillovers in asset markets through forced liquidations….
Now that they’ve got your attention: JK! They saved the punchline for the next day’s blog post.
If all $280 billion of funds in our sample suffered the 50 percent redemption shock, spillover losses would amount to almost $9 billion for the whole open-end mutual fund sector. In this set of funds, no particular fund seems capable—by virtue of its size or asset holdings—to impose significant large fire-sale spillovers on its own….
These numbers seem relatively small and nonsystemic….
Are Asset Managers Vulnerable to Fire Sales? [N.Y. Fed Liberty Street Economics blog]
Quantifying Potential Spillover from Runs on High-Yield Funds [N.Y. Fed Liberty Street Economics blog]