The Bank for International Settlements published BIS Quarterly Review research on how market pressure on banks and financial strain at investment funds evolve together. Using bank credit default swap (CDS) spreads to identify periods of heightened banking-sector pressure and net fund flows relative to assets under management (AUM) as a measure of fund strain, it finds that when elevated pressure on banks intensifies, net flows decline across open-ended corporate bond mutual funds, corporate bond exchange-traded funds and prime money market funds, and that this commonality has strengthened materially over time. The study also finds important differences by fund type, with corporate bond ETFs tending to remain in net inflow territory during stress, while corporate bond mutual funds experience material outflows that can tighten market conditions when banks are already under pressure. The analysis uses nearly 20 years of monthly data covering 53 large banks in 15 jurisdictions and fund-level samples drawn from the top 500 entities by AUM in each sector (with prime money market funds limited to US-domiciled funds). High-pressure banking episodes are defined within two subperiods (January 2006 to December 2013 and January 2014 to August 2024) as months in the top 10% of four-month changes in the median bank CDS spread. Correlations between banking-sector CDS changes and fund strain during high-pressure episodes rose from below 30% in the earlier subperiod to above 50% in the later subperiod, with the bond mutual fund sector reaching about 80% in the later period. Flow distributions differ sharply across sectors: bond ETFs and prime money market funds tend to see higher net flows in high-pressure episodes, while bond mutual funds experience outflows 75% of the time in high-pressure episodes. In simulations for the later subperiod, a typical adverse shock to bank CDS spreads implies bond ETF flows that fall but remain positive, while bond mutual fund outflows are large, at nearly half the peak outflows seen in the initial phase of the Covid-19 pandemic; within bond mutual funds, funds with initially low liquidity buffers both drive outflows and tend to hoard cash, consistent with illiquid asset sales. The article concludes that containing disruptive redemptions in open-ended corporate bond mutual funds, including through structural measures that reduce investors’ first-mover advantage or liquidity management tools, has macroprudential value, and notes that the Financial Stability Board and the International Organization of Securities Commissions have recently issued recommendations in this area. It also flags further work to quantify how redemptions translate into asset sales and price effects, potentially via system-wide stress testing.
Bank for International Settlements 2025-03-11
Bank for International Settlements research finds bank stress increasingly coincides with fund strain as bond ETFs stabilise but bond mutual funds amplify pressure
The Bank for International Settlements published research showing that market pressure on banks and financial strain at investment funds have become more tightly linked, with heightened bank credit default swap spreads increasingly associated with declining net flows at open-ended corporate bond mutual funds. Corporate bond exchange-traded funds and prime money market funds generally maintain positive flows during stress, while bond mutual funds face frequent and sizable outflows, especially where liquidity buffers are low. The article concludes that measures to contain disruptive redemptions in open-ended corporate bond mutual funds have macroprudential value and highlights ongoing international work on related policy tools.