ESRB Advisory Scientific Committee Report on Exchange-Traded Funds
The Advisory Scientific Committee of ESRB published a report presenting the main channels through which exchange-traded funds have the potential to affect systemic risk. The study concludes that, while some of these channels are common to other investment vehicles, their presence on primary and secondary markets, along with the rapid development of the exchange-traded fund sector, warrants further analysis of exchange-traded funds.
The report focuses on the potential systemic risks that may be associated with the spread of exchange-traded funds and highlights the key reasons why exchange-traded funds could pose systemic risks. In addition, the report concludes that exchange-traded funds may raise systemic risk through four main channels:
- Higher volatility and co-movement of security prices, especially at times of market stress and if the constituent securities are illiquid
- Decoupling of exchange-traded fund prices from those of constituent securities at times of stress, with destabilizing effects on financial institutions heavily exposed to exchange-traded funds or reliant on them for liquidity management
- Inducement of investors to take large correlated exposures, which may result in contagion in the event of sharp exchange-traded fund price drops
- Materialization of operational risks in a major provider of exchange-traded funds, which may generate widespread sales of exchange-traded funds owing to the sector’s very high level of concentration
The report does not discuss specific policy measures, but does call for further empirical research in the following two areas:
- Exchange-traded fund order flows in periods of stress and their impact on the volatility, co-movement, and illiquidity of both exchange-traded funds and constituent securities
- The extent to which financial institutions have significant and common exposure to exchange-traded funds and/or rely on them to manage liquidity
Related Links
Keywords: Europe, EU, Banking, Securities, Systemic Risk, Liquidity Management, Liquidity Risk, Exchange Traded Funds, ESRB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Blake Coules
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
BNB Sets Countercyclical Buffer at 1% for Fourth Quarter of 2020Related Articles
EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
EBA Publishes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
EIOPA Examines Physical Climate Risk Exposure, SII Non-Compliance
The European Insurance and Occupational Pensions Authority (EIOPA) published a report assessing insurers' exposure to physical climate change risks
NGFS Report Explores Quantification of Climate Risk Differentials
The Network for Greening the Financial System (NGFS) published two reports to aid central banks and regulators in their oversight of the financial sector and in their central bank operations
EC Publishes Results on Review of Web Accessibility Directive
The European Commission (EC) published the results of a public consultation, held in October 2021, on the review of the Web Accessibility Directive.
MAS Consults on Adjustment Spreads for Conversion of SOR Contracts
The Monetary Authority of Singapore (MAS) and the SC-STS are jointly consulting, until June 10, 2022, on setting adjustment spreads for the conversion of legacy SOR contracts to SORA reference rate.
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
