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Progress and ConfusionThe State of Macroeconomic Policy$
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Olivier Blanchard, Raghuram G. Rajan, Kenneth S. Rogoff, and Lawrence H. Summers

Print publication date: 2016

Print ISBN-13: 9780262034623

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034623.001.0001

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Systemic Risk and Financial Regulation: Where Do We Stand?

Systemic Risk and Financial Regulation: Where Do We Stand?

Chapter:
(p.73) 7 Systemic Risk and Financial Regulation: Where Do We Stand?
Source:
Progress and Confusion
Author(s):

Philipp Hildebrand

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262034623.003.0007

This chapter makes the case that neither the risk of liquidity scarcity in financial markets nor the presence of large asset managers are new sources of systemic risk. New regulations aimed at making banks safer have curtailed a “liquidity illusion” caused by market-making by banks, and market participants need to readjust their assessment of liquidity risks accordingly. As for large asset management companies, the chapter makes the case that even the largest of these companies represent only a small fraction of global financial markets, and the approaches these companies follow (often passive or based on fixed allocation) makes them less likely to cause large swings in valuation. Some of their activities and products may be a source of risk however, for example open-end funds that promise liquidity while being invested in less liquid assets.

Keywords:   systemic risk, liquidity risk, liquidity illusion, asset managers, investment strategies, open-end fund

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