We should consider giving authorities a greater ability to provide direction on the use of liquidity management policies by fund managers. This applies both to exceptional circumstances – where authorities currently only have the option to suspend redemptions, which may be detrimental for investors searching for liquidity – and also to normal times to limit the build-up of vulnerabilities in the first place. Second, regulatory shortcomings regarding the use of leverage need to be further addressed. In particular, we need to make sure that authorities can make effective use of their existing ability to limit leverage for alternative investment funds where, so far, a major impediment has been the lack of clarity on how it should be applied in practice. And, third, the crisis has shown that the current regime for MMFs may be inadequate in certain aspects and that regulatory reform in this area could be needed to mitigate liquidity mismatches and reduce the risk of suspensions during periods of stress. This includes a review of the liquidity requirements for MMFs and their portfolio composition, especially for LVNAV funds given their vulnerability to liquidity shocks. Conclusion https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201119_1~4a1ff0daf9.en.html  5/7  20/11/2020  COVID-19 and the liquidity crisis of non-banks: lessons for the future  All in all, and with this I would like to conclude, the market turmoil earlier this year suggests that structural fault lines in the non-bank financial sector continue to persist.
I will then explore some of the regulatory gaps that need to be closed with a view to both strengthening the resilience of the financial sector and mitigating the risk of financial dominance. The expansion of the non-bank sector The financial sector landscape in the euro area has changed significantly over the past decade. Today, non-bank credit accounts for around a third of firms’ total external debt financing, twice the share in 2008 (see left chart slide 2). And the share of marketable debt securities in external financing has also doubled in the euro area since the global financial crisis (see right chart slide 2). These developments are to be welcomed. There are significant advantages of having broad and diversified funding sources. If properly regulated, a diverse financial system has the capacity to distribute risk more efficiently, foster economic resilience and allocate funds more effectively towards their most productive uses. [1] This is why the ECB has repeatedly called upon legislators to accelerate progress towards a true capital markets union in Europe. [2] A more balanced funding mix is also important as a shock absorber, or as “spare tyre” as Alan Greenspan famously put it. [3] When the global financial crisis and the sovereign debt crisis hit the euro area, the disproportionate reliance on the banking sector as a source of external finance threatened to destabilise not only the economy but also cohesion in the single currency area.