This translates into a more competitive and more innovative financial system, one that is more flexible and resilient, with weakness in one part of the system more likely to be offset by a capacity for expansion elsewhere. And, because their overall risk profiles are likely to differ from banks, the greater importance of non-bank financial intermediaries, and of the capital markets more generally, offsets some of the potential concern associated with consolidation in the banking system. Within the universe of non-bank financial intermediaries, there are other material changes worth noting. Let me highlight three. First, the role of the major investment banks in the United States as market makers and providers of liquidity in a broad range of foreign exchange, securities, and derivatives markets has continued to grow over the past decade, as has the international importance of these firms. These institutions are now key participants in the domestic and international clearance and settlement processes associated with these activities. Second, a sustained period of rapid growth in the major mortgage GSEs has left us with two very large financial institutions, whose balance sheets and associated off-balance sheet positions today account for a much larger share of the U.S. mortgage market than was the case a decade ago. This means that the credit and market risks associated with the home mortgage business in the U.S. are now in some respects more concentrated. It means that the actions taken by the GSEs to manage interest rate risk can have a substantial impact on interest rate volatility.

It will be important to develop comparable leverage measures in line with the recommendations of the Financial Stability Board (FSB) to the International Organization of Securities Commissions (IOSCO).6 This will facilitate consistent monitoring and assessment of the build-up of risks in the investment fund sector. As the global crisis has shown, we cannot afford to be complacent and must remain vigilant to possible new risks that might emerge in the financial system. So we need to better understand the macroprudential dimension of risk in the investment fund sector. And we need to further enhance the sector’s resilience to system-wide shocks. Possible macroprudential and other policy responses – what needs to be done? Let me now set out a few regulatory actions which could contribute to mitigating risks arising from interconnectedness, liquidity and leverage in the investment fund sector. Let me start with interconnectedness and the links to banks in particular. The global financial crisis showed that banks sometimes have incentives to step in to support unconsolidated entities such as special purpose vehicles or investment funds with which they have a business relationship. Explicit contractual obligations are already captured by a number of post-crisis 4/7  BIS central bankers' speeches  reforms, in particular by revisions to the securitisation framework and by enhancements to consolidation rules for off-balance sheet entities.7 But the risk that a bank provides financial support to an unconsolidated entity that is facing stress, over and above any contractual obligations has not yet been addressed.