Global Risk, Non-Bank Financial Intermediation, and Emerging Market Vulnerabilities
Over the last two decades, the unprecedented increase in non-bank financial intermediation, particularly open-end mutual funds and ETFs, accounts for nearly half of the external financing flows to emerging markets exceeding cross-border lending by global banks. Evidence suggests that investment fund flows enhance risk-sharing across borders and provide emerging markets access to more diverse forms of financing. However, a growing body of evidence also indicates that investment funds are inherently more vulnerable to liquidity and redemption risks during periods of global financial market stress, increasing the volatility of capital flows to emerging markets. Benchmark-driven investments, namely passive funds, appear particularly sensitive to global risk shocks such as tightening US dollar funding conditions relative to their active fund counterparts. The procyclicality of investment fund flows to emerging markets during times of global stress poses financial stability concerns with implications for the role of macroprudential policy.
When citing this paper, please use the following: Chari, Anusha. 2023. Global Risk, Non-Bank Financial Intermediation, and Emerging Market Vulnerabilities Annu. Rev. Econ. 15: Submitted. DOI: https://doi.org/10.1146/annurev-economics-082222-074901 I have nothing to disclose. I did not receive any outside funding for this research. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Anusha Chari, 2023. "Global Risk, Non-Bank Financial Intermediation, and Emerging Market Vulnerabilities," Annual Review of Economics, vol 15(1).