If anything, the liquidity mismatches observed in bond and equity funds call for greater scrutiny of market practices and a possible review of the regulatory framework to ensure the sector’s resilience also in stressed market conditions. More generally, through increased risk-taking and leverage, non-banks may currently be contributing to the cyclical under-pricing of risks and the amplification of asset prices.
If these risks were to unwind in a disorderly manner, this could lead to funding flows drying up and affect the funding conditions of the real economy more broadly. Moreover, distress in the non-bank sector could spread to the banking sector as well, due to the strong links between the two.