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Higher inflows and greater risk-taking by managed funds searching for yield during periods of expansionary monetary policy may lead to a build-up of liquidity risk, leaving the fund sector vulnerable to large outflows during future crises, a working paper published Tuesday by the European Central Bank found.

Highlighting the increasing importance of investment funds in the transmission of euro area monetary policy in the euro area, the study's authors recommend supervisory measures intended to limit liquidity risk in individual funds and prevent system-wide liquidity strains, including minimum liquid asset buffers or restrictions on redemption frequency and minimum redemption notice periods.