This issues note describes a high-level approach to addressing risks in investment funds that invest in assets which are either inherently illiquid or might become illiquid in times of stress. In particular, the note focuses on investment funds with large exposures to corporate debt and real estate. This reflects the priority areas meriting enhanced scrutiny from a financial stability perspective that the European Systemic Risk Board (ESRB) has identified.

Highlights of the issues note:

• Structural vulnerabilities of investment funds arise mainly from liquidity mismatch and the use of leverage. Structural vulnerabilities in investment funds that invest in assets which are either inherently illiquid or might become illiquid in times of stress are not fully addressed in the current regulatory framework.
• Investment fund resilience could be improved by adapting certain policy tools already present in the regulatory framework to better serve financial stability purposes.
• In addition to adapting existing policy tools, the development of new policy tools might be useful in increasing investment fund resilience and thus benefit the stability of the wider financial system. There is merit in analysing and exploring further avenues to enhance the policy toolkit for investment funds from a financial stability perspective.

ESRB, September 2023 - Read the Report

See also:

• Corporate Credit and Leverage in the EU: Recent Evolution, Main Drivers and Financial Stability Implications (29 June 2023)