Clear communication reduces the risk of confusion, volatility, and spillovers, and helps others prepare for challenges that may lie ahead. Experience has demonstrated that transparency in monetary policy can both increase its effectiveness and reduce unintended consequences. Shared Insights and Analyses 1/2  BIS central bankers' speeches  That is why the perspectives we gain through ongoing dialogue with our counterparts are so valuable. Across the globe, many central banks—including the Federal Reserve—are moving to unwind the highly accommodative policies they put in place at the start of the pandemic. And we are doing this at a time when the economic implications of COVID-19 and the war in Ukraine remain highly uncertain. As we all take these steps, the Bank for International Settlements (BIS) has provided an indispensable venue for sharing insights, analyses, and concerns. By engaging with each other, we are able to stay ahead of the trends and issues that affect other economies and their financial markets. And that is true not only when it comes to policy development and execution, but also in understanding economic and financial developments across the globe. A particularly apt example of the value of dialogue is the BIS’s Consultative Council for the Americas, which I’ve had the pleasure of chairing since 2020. Agustín, Julio, Roberto, and our colleagues from Argentina, Canada, Chile, Colombia, and Mexico are participants in meetings of the Council. Suffice to say, we’ve had a great deal to discuss over the past two years.

In this loop, we describe what has been termed a liquidity spiral, where an initially liquid bank’s concern about the solvency of its counterparty (or solvencies of its counterparty’s counterparties) or perhaps concern that itself may run into funding difficulty in the future, decided to forgo interbank interests and began to hoard liquidity. When enough institutions embarked on the  BIS Review 130/2009  3  same actions, a general freeze in liquidity ensued, leading to “unnecessary” defaults that further exacerbated doubts in the system. These examples of positive feedback loops were some of the interactions that took place in the amplification stage of the crisis, as market participants responded to specific problems and general distress. But while the feedbacks were important in themselves in setting off deleveraging and losses, it was also the interactions between these feedbacks that contributed hugely to intensifying the problem and multiplied the losses into a larger systemic problem. What we saw was the rapidly worsening crisis that spread beyond financial institutions into money and capital markets. On this aspect of loss intensification, a number of studies have pointed to joint exposures to common risk drivers and network linkages between financial institutions to be the two key propagation channels. Let me elaborate further on this point. First, propagation channel in the form of joint exposures to common risk drivers means that different financial institutions are becoming not so different. In other words, their investment strategies and methods for minimising regulatory capital were beginning to copy one another.