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November 30, 2017

ECB published a paper on developing macro-prudential policy for alternative investment funds (AIFs). This joint ECB-DNB occasional paper aims to inform the ongoing discussions about an EU-level framework for operationalizing macro-prudential leverage limits for alternative investment funds (AIFs).

First, the paper presents new EU-level evidence suggesting that leveraged funds exhibit stronger sensitivity of investor outflows to bad past performance than unleveraged funds, which has the potential to exacerbate systemic risk. Second, it devises a framework for assessing financial stability risks from leverage in investment funds. This is applied to leveraged AIFs managed by asset managers in the Netherlands using Alternative Investment Fund Managers Directive (AIFMD) data for the two-year period from the first quarter of 2015 to the fourth quarter of 2016. Third, it discusses the potential effectiveness and efficiency of various designs for macro-prudential leverage limits. To this end, it builds on the findings for the Dutch AIF sector and suggests design options for further exploration at EU level.

Beyond assessing financial stability risks from leverage in the Dutch AIF sector, the case study aims to show how equivalent information on AIFs at the European level could be used when developing an EU-level framework for operationalizing macro-prudential leverage limits. This information at the European level will be made available to ESMA and ESRB in the coming years. The paper builds on, and extends, the analysis of an ECB-DNB special feature article published in the Financial Stability Review of ECB in November 2016.

 

Related Link: ECB-DNB Paper (PDF)

Keywords: Europe, EU, Banking, Securities, Macroprudential Policy, AIF, AIFMD, Financial Stability, DNB, ECB

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