They should aim to mitigate risks related to pro-cyclical risk taking, excessive leverage, liquidity and maturity transformation by increasing transparency on fund leverage and aligning redemption terms more closely with the liquidity of funds’ assets, for example.
By internalising the impact that non-banks’ actions might have on the rest of the financial system and the real economy, such policy tools might curb non-banks’ potential to amplify exuberance in upturns and adversely affect financial and economic conditions in downturns. Conclusions Let me conclude. At present, the weaker cyclical momentum and the low interest rate environment are weighing on bank profitability.