Although funds temporarily increased their holdings of liquid assets in response to this year’s market stress, their cash positions have already returned to pre-pandemic levels. This again leaves the sector vulnerable to large redemptions in the event of any renewed stress in the financial markets. Moreover, financial vulnerabilities were aggravated by investment funds continuing to increase their exposure to credit risk.
More than three-quarters of the bonds purchased by funds after March 2020 were rated BBB or below. Policy considerations for the banking sector Starting in March 2020, European and national prudential authorities took swift and extraordinary policy measures to address the impact of the pandemic on the euro area banking sector.