Discussion Paper 11 – An approach to macroprudential policy for investment funds

The CBI has issued a Discussion Paper titled „An approach to macroprudential policy for investment funds“ and is inviting feedback on various aspects related to this policy framework.
These are the key points covered in the Discussion Paper:
Objectives and Rationale: The Discussion Paper aims to stimulate discussions on the development and operationalization of a macroprudential framework for the investment funds sector. While macroprudential policies are well-established in the banking sector, they are still evolving for non-bank financial intermediaries, such as investment funds.
Significance of Investment Funds: The investment fund component of the non-bank financial intermediaries (NBFI) sector has grown significantly since the Global Financial Crisis (GFC), with global assets reaching €212 trillion in 2021. This growth underscores the increasing importance of the funds sector in the global financial system.
Benefits of Financial Intermediation: The funds sector plays a crucial role in diversifying financing channels available to the real economy, supporting economic activity, and acting as an alternative to traditional bank financing. This aligns with the EU’s Capital Markets Union (CMU) policy agenda.
Systemic Risk Considerations: The Discussion Paper acknowledges that investment funds can generate systemic risk due to factors like leverage, liquidity mismatch, and interconnectedness. It emphasizes the need for systemic risk assessment and mitigation strategies.
Heterogeneity in Fund Cohorts: Different types of investment fund cohorts pose varying levels of systemic risk. These differences must be considered in systemic risk assessments and policy deliberations.
Regulatory Framework Evolution: The current regulatory framework for the funds sector primarily focuses on investor protection. Recent episodes have highlighted its limitations in addressing systemic risk. Therefore, a macroprudential perspective is deemed necessary.
Global Coordination: The Central Bank recognizes the importance of international coordination in developing and operationalizing a macroprudential framework for the funds sector due to its global nature.
Focus on Investment Funds: While other segments of the NBFI sector may require a macroprudential perspective in the future, the Central Bank has chosen to concentrate on the investment funds segment due to its significance in Ireland’s financial intermediation.
Engaging Stakeholders: The Discussion Paper aims to engage stakeholders both domestically and internationally, seeking feedback and responses to specific questions posed within the document.
The Central Bank invites stakeholders’ written responses to the issues discussed and the list of questions outlined in this Discussion Paper. Beyond the specific questions, stakeholders are also invited to provide observations and commentary on any aspect of the Discussion Paper. Here the actual questions open for consultation:
Question 1: Do you agree with the above assessment of the potential channels through which investment funds can generate systemic risk?
Question 2: Do you agree with the assessment in this Discussion Paper that it is primarily the collective actions of investment funds that can generate systemic risks?
Question 3: Do you agree that the current regulatory framework for funds – which has primarily been designed at a global level from an investor protection perspective – has not been sufficient to reduce the propensity of certain fund cohorts to amplify shocks?
Question 4: Do you agree with the key proposed objectives and principles of macroprudential policy for funds as set out in this Discussion Paper? Are there additional principles, which need to be considered?
Question 5: Do you agree with the analysis and the issues highlighted pertaining to the design of potential specific macroprudential tools for the funds sector? Are there are additional potential tools that could be explored?
Question 6: Do you agree that tools could target the interconnectedness of funds as well as/instead of their vulnerabilities?
Question 7: Do you agree with the governance and data considerations highlighted in this Discussion Paper when operationalising macroprudential policy for funds?
Question 8: Beyond governance and data considerations, are there additional issues that need to be considered when operationalising macroprudential policy for funds?
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Stakeholders are encouraged to submit written responses by 15 November 2023, with the intention to publish these contributions. The Central Bank intends to consider the feedback received to inform its participation in international and European regulatory discussions on this topic and its broader policy and analytical work related to investment funds.