Only 8 Spanish Funds Would Have Liquidity Problems In The Event Of A ‘Major Shock’

The categories of sovereign and corporate IG, high yield corporate and "Other" present some funds with liquidity problems

Spanish mutual funds has a high degree of liquidity. This is the conclusion reached by the CNMV after analyzing the mutual funds in a statistical exercise that puts the funds in a potential situation of “large-scale shock” and with a “very low probability of occurrence” to determine what could happen in the event of participants requesting massive redemptions in the case of a crisis such as the one caused by Covid19 .

In response to the concern of various organizations (ESRB, IOSCO or FSB) about the role of investment vehicles in the transmission of systemic risk, the CNMV used a stress test methodology for mutual funds to detect those funds and categories of funds that could present liquidity problems in adverse scenarios, both macroeconomic and in the financial markets.

Only in “very extreme” scenarios could some categories of funds present problems, and only to a “limited extent”. Thus, only when considering a stress greater than that which occurred during the Great Recession or the shock produced by Covid19 , the categories of sovereign and corporate IG, high yield corporate and “Other” present some funds with liquidity problems. These funds represent 2.5%, 16.7% and 1%, respectively, of the total number of funds in each category.

The exercise shows that only eight Spanish mutual funds could present problems, while the total number of existing mutual funds is 2,700 according to the latest report by Pablo Fernandez (IESE).

These tests, presented together with the CNMV’s third quarter 2020 bulletin, also measure the impact that the funds’ liquidity problems could have on the fixed-income and equity markets, and conclude that such an impact would be “very limited”. Specifically and on average, its impact would be at most: 3.09 basis points on government debt assets, 7.95 basis points on investment grade private debt assets, 5.59 basis points on speculative grade private debt assets and 8.17 basis points on equity assets.