Week InReview: May 20, 2016

'An empirical assessment of the price of liquidity will also need to take into account the evolution of the attendant risks. This leads me to the topic of asset managers. Having gained in market presence post-crisis, asset managers and their activities are receiving much more attention because their business models can spur behaviour that amplifies market volatility. This is what we call leverage-like behaviour. Such behaviour sows the seeds of market liquidity risks.

'While dealers are scaling down the provision of market liquidity, asset managers continue to promise redemptions at short notice, thus encouraging their clients' liquidity illusion. As they may not be able to live up to their promises under financial stress, asset managers could exacerbate liquidity shortages at the wrong time.

'Prudential work is under way in this area, involving asset managers and supervisors. The former will need to internalise recent market changes in general and changes to the provision of liquidity services in particular. In turn, supervisors are stepping up the usage of stress tests.'

From a speech by
Jaime Caruana
BIS General Manager
Lisbon, Portugal
May 10, 2016

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