Financial Stability

In this ViewPoint, we make a holistic assessment of U.S. short-term markets during the March market turmoil. We identify three key components of the short-term market ecosystem: market structure, banks as intermediaries, and money market funds.

In this ViewPoint, we explore various aspects of the U.S. municipal bond market ecosystem during the COVID-19 Crisis, the Federal response to provide assistance to municipalities, and the approach to liquidity risk management of municipal bond funds.

In this ViewPoint, we explore how ETFs were a source of stability during the first part of 2020 amidst unprecedented market volatility by providing price transparency and liquidity.

In this ViewPoint, we make a holistic assessment of European short-term markets during the March market turmoil. We identify three key components of the short-term market ecosystem: market structure, banks as intermediaries, and money market funds.

In this Policy Spotlight, we note the sharp uptick in ‘fallen angel’ bonds being downgraded from Investment Grade to High Yield resulting from economic shutdown measures, a trend likely to continue.

In this Policy Spotlight, we discuss how index providers’ decisions to delay fixed income index rebalancing during March 2020 helped to preserve market liquidity.

In this Policy Spotlight, we provide an update to our August 2019 spotlight on US BBB Bonds in light of the first broad credit downgrade cycle resulting from COVID-19 and lower oil prices.

This whitepaper, written by BlackRock and 18 other buy- and sell-side firms, puts forth 20 principles on CCP resilience, recovery, and resolution.

In this ViewPoint, we examine financial regulatory reforms over the past decade, with a focus on the asset management sector. In addition, we look ahead and identify several areas that merit additional study from a systemic risk perspective.

Updated to reflect developments from April 2018 to April 2019, this ViewPoint considers the future of LIBOR and alternative reference rates.

As policy makers are reviewing whether post-crisis regulatory reforms properly balance the objective of mitigating systemic risk without impeding economic growth, it is important to distinguish market-based finance from shadow banking. The current lack of a clear distinction can hinder regulators’ ability to fully monitor and address risk in the financial system. In this ViewPoint, we lay out a framework for differentiating shadow banking from market-based finance using a continuum that corresponds to risks, with a focus on the manner in which activities are funded and whether or not there is access to official sector backstops.

German language edition of Taking Market-Based Finance Out of the Shadows: Distinguishing Market-Based Finance from Shadow Banking.

Remarks by Barbara Novick on international financial regulatory reform from the asset management perspective.

Remarks by Barbara Novick at the European Central Bank 2nd Annual Macroprudential Policy and Research Conference on macroprudential policies in asset management.

Letter to the FSB in response to their consultation on the Proposed Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms.

As banking reforms come to completion, some policy makers are considering extending the perimeter of macroprudential regulation beyond banking to asset management. This has sparked a debate about system-wide stress testing, including stress tests across mutual funds and stress tests of asset managers. In this ViewPoint, we outline challenges to implementing system-wide stress testing and survey macroprudential tools that have been contemplated.

Remarks by Barbara Novick at the Brookings Institute on bond market liquidity and financial markets.

This ViewPoint focuses on the Asian bond market size, liquidity and ownership of local-currency (LC) markets. Given its increasing size and importance, the structure of the Chinese bond market is highlighted in a separate section. We outline the key parameters of the foreign (FC) markets in the region and review the rise in importance of bond ETFs as additional source of liquidity to bond investors and the potential for development of this market segment in Asia. We offer several policy recommendations to help stimulate further growth in Asia’s fixed income markets.

The dialogue on bond market liquidity has largely focused on a few key trends: (i) the decline in broker-dealer inventories, (ii) the decline in bond turnover (trading volume as currently measured divided by outstanding debt), (iii) the increase in corporate bond issuance, and (iv) the growth of bond mutual funds. While the data cited are factually accurate, these isolated data points do not present a complete picture of bond market participants or innovations that are supplementing traditional means of obtaining market liquidity. This ViewPoint is intended to inform discussions about bond market liquidity by integrating data we have known about for a long time (e.g., bond ownership by pensions and insurers) with newer data that highlights structural changes to bond market liquidity. Based on our synthesis of the new data with the old, we make a number of observations to provide a more comprehensive foundation for the dialogue on bond market liquidity.

Letter to the FSB in response to their Consultative Document for Proposed Policy Recommendations to Address Structural Vulnerabilities for Asset Management Activities.

This ViewPoint is a continuation of previous BlackRock publications addressing market liquidity, focusing this time specifically on euro denominated debt, and integrating European data around trading and ownership. We begin by sizing the euro corporate bond market and move on to discuss secondary market liquidity. We then look at ownership of euro area debt, as well as evaluate the implications of the European Central Bank’s (ECB) corporate bond buying programme on euro corporate bond ownership and liquidity, and the rise of bond Exchange Traded Funds (ETFs) in Europe as a source of bond market liquidity.

This ViewPoint explores the diversity of US bond funds and the diverse range of investments made by funds within each category. We then review data on investor flows in the largest categories of bond funds to analyze investor behavior in response to historical market stress events. We observe different flow patterns in various categories of bond funds during these periods of market stress, which suggests that bond fund investors do not treat all bond funds as a single asset class, even during times of market stress. Based on this analysis, we conclude that any macro stress test that is unable to capture the diversity of bond funds and incorporate performance of different fixed income asset classes is unlikely to produce results that are reflective of potential market dynamics, particularly if such models assume that all bond fund shareholders react in the same way in response to market stress. Stress testing of individual funds should be incorporated into mutual funds’ liquidity risk management programs.

Remarks by Barbara Novick at the Risk USA Conference on risks in asset management.

Remarks by Barbara Novick at the Exchequer Club on market liquidity and fund redemption risk.

Letter to the European Commission in response to their call for evidence on the EU regulatory framework for financial services.

Submission to MIT Center for Finance and Policy and Harvard Crowd Innovation Laboratory Contest, “What is a Systemically Important Financial Institution?” This paper examines sytemic risk across the financial ecosystem and posits that leverage and function are more important than size. This submission won second place in the contest.

Remarks by Barbara Novick at the EUROFI Financial Forum 2015 on bond market liquidity.

This ViewPoint provides an overview of the structural features of ETFs. Further, we discuss the benefits of bond ETFs, including transparency and price discovery, and some of the challenges, including the need for a classification system that better distinguishes among several types of exchange-traded products. We offer some suggestions for concrete regulatory actions that can extend the benefits of ETFs to a broader investor base and improve financial stability.

This ViewPoint defines the different concepts that have been referred to as “liquidity” that are often conflated, highlights some of the ways that asset managers are already adapting, and provides recommendations for actions to improve the market ecosystem. Our recommendations take a three-pronged approach: (i) market structure modernization, (ii) enhance fund “toolkit” and regulation, and (iii) evolution of new and existing products, which includes embracing products that can help market participants address the challenges of today’s market environment such as bond ETFs.

Letter to the FSB-IOSCO in response to their second consultation on Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions.

This ViewPoint examines securities lending, explaining the respective roles of lenders, lending agents, and borrowers. This paper describes how concerns raised regarding securities lending practices and associated risks, including the selection of counterparties, collateralization of loans, use of cash collateral and cash reinvestment vehicles, the uses of non-cash collateral and rehypothecation, and borrower default indemnification are addressed. This ViewPoint also explains the mechanics of securities lending, the risks involved, and how these risks are managed.

Remarks by Barbara Novick at the Federal Reserve Bank of Atlanta 2015 Financial Markets Conference on policy session 2 focused on shadow banks and macroprudential policy.

Letter to FSOC in response to their request for comment on asset management products and activities.

Roadmap of various products and activities and asset management where changes in regulation could potentially be warranted.

This ViewPoint examines the liquidity risk management practices of bank loans, high yield and emerging markets debt mutual funds. Our analysis of historical data over several market cycles and our experience in the markets shows that the concerns expressed by policy makers have not arisen in the past.

This ViewPoint examines and compares the structural features of several fund types across a wide range of jurisdictions and identifies a number of existing regulations that serve to mitigate “run risk” and protect investors.

This paper explains the distinctions between asset owners, asset managers, and intermediaries and highlights the impact that post-financial crisis monetary policies and financial regulatory reforms have had on the investment decisions of asset owners. The paper also explores the current regulatory paradigm for funds to establish a framework for potential solutions and identifies several recommendations.

Letter to the FSB-IOSCO in response to their first consultation on Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions.

Additional letter to the SEC providing feedback on the OFR study on asset management and financial stability.

Harvard Law School EU-US Symposium Concept Paper focused on systemic risk and asset management.

Additional letter to the SEC providing feedback on the OFR study on asset management and financial stability.

Addendum letter to the SEC following up on our November 2013 letter providing feedback on the OFR study on asset management and financial stabillity.

Letter to the SEC responding to the OFR study on asset management and financial stability.

This report analyzes various risks to the U.S. financial system, finding that while overall risk is medium, solvency and leverage risk remains low.

This final interpretive guidance implements an activities-based approach to identifying and addressing potential financial stability risks. The guidance also enhances the analytic framework by including a cost-benefit analysis and creates a more transparent process for designating nonbank financial institutions.

This report provides an overview of developments in financial stability over the course of 2019. It also examines policy measures Council member agencies have taken to improve efficiency of financial market regulation, as well as areas for further analysis and policy recommendations.

This report, revised in June 2019, provides an overview of developments in financial stability over the course of 2018. It also examines policy measures Council member agencies have taken to improve efficiency of financial market regulation, as well as areas for further analysis and policy recommendations.

This report provides an overview of the FSB's policy priorities and monitoring of the effects and implementations of the G20 financial regulatory reforms, including any unintended consequences, for the period April 1, 2017 to March 31, 2018.

This report provides an overview of the FSB's policy priorities and monitoring of the effects and implementations of the G20 financial regulatory reforms for the period April 1, 2016 to March 31, 2017.

This report provides an overview of developments in financial stability over the course of 2017. It also examines policy measures Council member agencies have taken to improve efficiency of financial market regulation, as well as areas for further analysis and policy recommendations.

This report by the U.S. Treasury examines the current regulatory framework for the asset management and insurance industries and makes recommendations to ensure regulation is aligned with the Administration's Core Principles for financial regulation. The report focuses on four areas: the proper evaluation of systemic risk, ensuring effective regulation and government processes, rationalizing international engagement, and promoting economic growth and informed choices.

Press release by the Financial Stability Board (FSB) announcing that it has decided to wait to finalize assessment methodologies for non-bank non-insurer global systemically important financial institutions (NBNI G-SIFIs) until the FSB work on financial stability risks from asset management activities is completed.

This fact statement examines the potential deisgnation of asset managers as systemically important, noting that the Financial Stability Board's proposed SIFI designation methodology would exclusively apply to U.S. asset managers, raising the question of if this should be a matter solely for U.S. regulators.

Petition by the the American Council of Life Insurers, the American Financial Services Association, the Association of Institutional Investors, the Financial Services Roundtable, and the Asset Management Group of the Securities Industry and Financial Markets Association calling for the Financial Stability Oversight Council (FSOC) to propose amendments to their existing designation rules for systemically important non-bank financial institutions.

Readout from July 2014 Financial Stability Oversight Council (FSOC) meeting in which FSOC announced it would take a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry.

The Securities Industry and Financial Markets Association (SIFMA) asked its members and other firms listed in the “top 20 asset managers by AUM” in the OFR Study to respond to a survey regarding the separate accounts that they manage. This letter summarizes the process undertaken and the findings of the survey.