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C04: Regulating asset managers

We take an empirical law-and-finance perspective on an important class of shadow banking activity: asset management. We ask what the observed shift of business to asset management implies for financial stability. More specifically, we investigate whether asset managers substitute for banks in providing liquidity to financial markets. We focus on hedge funds, money market funds and plain-vanilla bond mutual funds, and we pay particularly close attention to the institutional and regulatory details.


Project members (C04)


Policy outreach (C04)


Publications (C04)


Discussion papers (C04)



Asset managers are key players in financial markets (40% of global financial assets). The financial crisis of 2007/08 has highlighted the importance of market liquidity for financial stability. Tightening bank regulation can drive financial activity to the asset management sector (regulatory arbitrage). Current reforms and policy debates increasingly address the regulation of asset managers.

Policy relevance

We assess the importance of asset managers for financial stability: Are stability risks migrating from banks to asset managers? We evaluate recently implemented regulation of hedge funds and money market funds. We inform the international policy debate about regulatory arbitrage between different jurisdictions. We develop specific proposals for the design of asset manager regulation.

Project plan

Work package 1 - Bank regulation, asset managers, and financial market liquidity

  • Has post-crisis bank regulation shifted trading activity from banks to asset managers?
  • Consider the relevant regulatory changes in bank regulation (e.g., structural separation, bonus caps) as a quasi-experiment.
  • Analyze the effects of regulatory changes on trading activity and liquidity provision by banks and asset managers, respectively.

Work package 2 - Hedge fund regulation and risk-taking by asset managers

  • Has the new regulation of hedge fund managers affected risk taking by hedge funds?
  • Exploit the differences in regulation between different jurisdictions.
  • Consider tail risk as the relevant risk in the context of financial stability: “Conditional value at risk" or leverage as dependent variable.
  • Investigate whether hedge funds engage in forum shopping to avoid new regulation (regulatory arbitrage).

Work package 3 - Money market funds and systemic risk

  • Exploit regulatory differences before the crisis across EU jurisdictions, especially France, Ireland, and Luxembourg.
  • Analyze the link between money market funds' exposure to runs during the financial crisis and the regulatory environment.
  • Evaluate regulatory changes in the EU's recently passed money market funds regulation.

Work package 4 - Bond funds and liquidity risk

  • Investigate the risk shifting of bond funds through investments in less liquid debt securities (search for yield).
  • Exploit the heterogeneity in liquidity requirements and special fund characteristics for identification.
  • Analyze the responses to shocks from unexpected changes in monetary policy.
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