The European Central Bank has published a Financial Stability Review analysis on liquidity mismatches in open-ended funds, using a system-wide agent-based model to assess redemption gates and anti-dilution levies. It finds that, if applied strictly and consistently across the sector, these liquidity management tools can reduce tail losses, protect more fragile funds and limit fire-sale spillovers to the broader financial system, while having no significant effect on banks’ capital ratios. The analysis comes as EU investment funds are required under UCITS VI and AIFMD II to operationalise at least two liquidity management tools from 16 April 2026, with ESMA recommending at least one price-based and one quantity-based tool. In the simulation based on the 2025 EU-wide stress test adverse scenario, a redemption gate of around 2% of total net assets reallocated second-round outflows away from smaller, less liquid and more vulnerable funds such as bond funds and towards larger, more resilient equity funds. When all funds applied a 2% gate, total sector redemptions fell by less than 5 basis points of fund sector assets. Anti-dilution levies, modelled in line with ESMA guidance and capped at 2% of the redeemed amount, transferred liquidity equal to about 5% of second-round redemptions, mostly between funds, with about 10% paid by banks. Both tools reduced fund losses in the tail of the distribution, ADLs had a larger effect than gates on the 75th and 90th percentiles, and neither configuration materially weakened banks. The ECB notes, however, that the model does not capture potential drawbacks such as pre-emptive redemptions, signalling effects across fund classes, or increased risk-taking incentives.
European Central Bank2026-05-27
European Central Bank analysis suggests 2% redemption gates and anti dilution levies can reduce fund tail losses with limited bank impact
The European Central Bank’s Financial Stability Review finds that strictly applied redemption gates and anti-dilution levies in open-ended funds can reduce tail losses, protect fragile funds and limit fire-sale spillovers without materially affecting banks’ capital ratios. Using a system-wide agent-based model based on the 2025 EU-wide stress test adverse scenario, the ECB shows that a 2% redemption gate and anti-dilution levies capped at 2% modestly lower sector redemptions and reallocate outflows towards more resilient funds, with anti-dilution levies having the larger impact. The ECB cautions that the model does not capture potential drawbacks such as pre-emptive redemptions or signalling effects.