Their exposure to these assets has reached almost 10% of total investment and is expected to rise further.14 As some of these assets are highly illiquid, the portfolio shift towards these assets may also increase insurers’ liquidity risk beyond credit risk. But this is only one example, where the credit risk on non-banks’ balance sheets is coupled with liquidity risk.
In fact, liquidity risk is particularly an issue for some bond and equity funds that invest in less liquid assets, while offering shortterm redemptions to their investors. These funds are vulnerable to sudden changes in investor sentiment, so-called “run risks”. Some recent cases were a reminder that investors in less liquid funds might indeed run if they fear deterioration in asset quality or liquidity.