These are all Over-the-Counter (OTC) markets. As such, they do not typically benefit from clearing through a Central Counterparty (CCP). CCPs effectively eliminate counterparty risk between trading participants. This crisis has been, first and foremost, a crisis of counterparty risk. So it is perhaps unsurprising that some OTC markets without a CCP have been hardest hit. Against this backdrop, the US authorities have recently proposed the extension of central clearing to all standardised OTC derivative instruments. 4 This is a bold measure and one which deserves international support. In time, it might usefully be extended beyond OTC derivatives to some cash OTC instruments, such as corporate bonds. The benefits of this shift are essentially threefold. First, central clearing encourages standardisation and simplification of the contractual terms of financial instruments. Instrument complexity has been a key fault-line exposed during the crisis, especially among bespoke structured credit products. Ahead of crisis, standardisation was seen as a pre-requisite for central clearing. CCPs should be better seen as a catalyst for such standardisation. In future, infrastructure design might usefully shape market convention, rather than vice-versa. Second, because a CCP represents a potential single point of failure, it needs to be bulletproof. Standards of resilience should be comparable with other public utilities, such as water, gas and electricity. That has implications both for CCP risk management standards and for governance arrangements. Both need importantly to weigh the public good of systemic risk containment.

Caught in this cross-fire, higher leverage became banks’ only means of keeping up with the Jones’s. Management resorted to the roulette wheel. As firms collectively migrated South-east in Chart 3, leverage increased across the financial system as a whole. Having bet the bank on black, many financial firms ended up in the red. Two lessons for the future suggest themselves from this prognosis. First, when evaluating banks and their management, there is a need for greater focus on returns on assets rather than on equity. Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole. Second, there is a need to place much stricter system-wide limits on leverage. These limits should aim to prevent the South-Easterly migration by banks under competitive pressure. 1  Charles McKay (1841), “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds”, London: Richard Bentley. 2  BIS Review 85/2009  That suggests these ratios will need to be state-dependent, rising as the temperature rises across the financial system as a whole. Some have called this a counter-cyclical regime. Given its source, it might better be called a counter-cultural regime. Lesson 3: Size does matter The “80/20 rule” has its origin in the study of contagious diseases. For a number of diseases, 20% of the population account for around 80% of the disease spread.