Do mutual funds make crises worse? |
September 23, 2011
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Raddatz and Schukler from the World Bank find that mutual funds are procylical and bond funds spread contagion across borders. They conclude that
The findings have important policy implications. Some proposals suggest a shift from banks to a mutual-fund model to avoid runs and contagion effects.
- This shift will not necessarily solve the problem that banks entail, since our results show that runs and contagion are possible even in equity funds.
So much for splitting banks into narrow banks and investment banks / mutual funds. Perhaps not so easy to have mutual funds (and pensions funds) finance all long term investment.
As noted by the latest IMF report GFSR, chapter 2, insurance companies and pensions funds are going short due to the crisis and Solvency II. So where to draw the line. May be vicker’s isn’t so bad after all?