5
│
Cross-cutting issues
59
The fire sale mechanism unifies several aspects of the propagation of the crisis. It describes the
way in which hedge funds, dealer banks and other NBFIs such as pension funds suffered huge
financial losses, largely from reductions in the value of their security holdings. And it explains why
institutions most reliant on short-term financing were particularly exposed. The common theme in
all these phenomena is the sidelining of natural buyers of distressed securities, generating
financial instability through lack of activity in key parts of the financial system.
5.5
Redemption risk
Redemption risk, in the context of this study, is the risk to financial stability resulting from the
correlated withdrawal of capital by investors from a non-bank financial institution/non-bank
financial sector.
Among the NBFIs considered in this study, investment funds are affected by redemption risk. In
itself, the materialisation of redemption risk can be deleterious to financial stability if large or large
numbers of NBFIs are directly impacted. In addition, these impacts may have knock on effects on
banks/other NBFIs.
In general, hedge funds and money market funds are particularly subject to redemption risk while
private equity funds are affected to a lesser degree. The reason for this difference is that hedge
funds and money market funds allow investors to withdraw their capital at short notice (in the
case of money market funds, this is part of their
raison d'être
), whereas private equity funds
require commitments for longer periods of time. In other words, a necessary condition for
redemption risk to exist is that investors have the option to redeem funds at low cost.
Redemption risk can arise, for instance, due to a non-bank financial institution being highly
leveraged. The non-bank financial institution may face liquidity risk if sufficient investor funds are
withdrawn simultaneously. It may realise losses that also affect financial stability. In this instance,
leverage is the underlying cause for the build up of redemption risk.
More interestingly, redemption risk can materialise in a non-bank financial sector in the absence
of underlying causes relevant to that particular sector (and due to underlying causes
elsewhere/proximate causes in the language of the framework for this study). As a result of some
impetus, it may be individually rational for investors to redeem funds due to the belief that other
investors are behaving in the same way. Collectively, this can lead to financial instability through a
given non-bank financial sector without risks ever having built up there. During the financial crisis,
for instance, problems arising within the banking sector fed through to prime MMFs due to the
perceptions and actions of investors in response to falling net asset values (NAVs) (see Chapter 7
for details).
Redemption risk could further lead to substantial financial instability as a result of feedback loops.
Among other things, counterparty risk may increase (or, may be perceived to increase) for
banks/other NBFIs if an important non-bank financial institution fails as a result of redemption risk
and is (or, is thought to be) connected to these banks/other NBFIs. Asset devaluations may come
about as large, leveraged institutions dump assets to meet collateral calls in the face of
redemptions, which goes on to affect the balance sheets of financial institutions holding the same
assets (so-called, fire-sale externalities), etc.
5
│
Do'stlaringiz bilan baham: |