The new financial order in the post-epidemic era -Part 2


Si Gyeongmin

Sep 19, 2021

As we all know, the reasons for NBFIs' instability are the mismatch of capital liquidity and the interaction between leverage and risk management, which are affected by regulation to a certain extent. Capital liquidity mismatch is very common in NBFIs, mainly in the money market and bond mutual funds. These tools incentivize investors to withdraw their funds before others, thus causing liquidity barriers similar to bank runs.

These mechanisms exerted a negative impact in March 2020. At that time, high-quality funds hoarded cash, and the sale of freely available assets for bond funds exceeded the amount required for redemption, thereby increasing the fund's cash position. The collective reduction and direct sales of investments on the maturity date have led to a deterioration in the overall liquidity of funds, which is an important factor in the "rush to buy cash". As in previous events, the pressure of capital liquidity spread to the offshore dollar financing market, affecting a large number of contracts around the world. The impact of these spillover effects once again highlights the close interaction between capital and market liquidity. Asset mismatches and unreasonable hedging will aggravate market chaos.

The use of leverage by NBFIs may also cause unstable dynamics due to abnormal feedback loops. This is partly because market prices not only reflect the fundamentals, but also because the constraints faced by the operation of NBFIs have triggered price fluctuations. In addition, in some key areas, due to the difficulty of liquidity providers to intervene, the market structure centered on traders has slowed the recovery of the market.


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