One example of this has been the exponential growth in “liquid alternatives”, giving retail mutual fund investors access to hedge fund-like strategies.17 The compression of liquidity risk premia suggests that investors are assuming any future withdrawals from funds will be conducted in an environment of continuous market liquidity and that the value of their fund holdings will not fall substantially when they exit. The risks to that assumption are in only one direction. The dynamic that fund under-performance tends to be punished with outflows creates the possibility of the sorts of spirals that were previously associated with leveraged investors. That potential procyclicality is reinforced by the selling of volatility-linked products by funds seeking to boost income through insuring tail risks. 14  Chart 7 shows model-based estimates of liquidity premia across corporate bond markets. On these measures, premia have returned to their pre-crisis levels. 15  Feroli, Kashyap, Schoenholtz, Shin (2014). 16  Chart 10 shows the increasing share of “redeemable funds” in overall assets under management. 17  Chart 11 shows the particularly sharp growth in assets under management in high-yield funds. BIS central bankers’ speeches  7  Although they were short-lived, the bouts of market turmoil in the past year have illustrated how there can be sudden and sharp outflows, particularly from high-yield and emerging market funds, resulting in illiquidity in the markets for those instruments.18 The macroprudential risk is that any revelation that continuous liquidity is illusory could generate potentially sharp changes in asset allocation.

Moreover, as bank balance sheets have shrunk, and as they have rebalanced more towards traditional banking than trading, they have become more focussed on the real economy. In short, any serious look at the experience of post-crisis reform shows that reform and regulation support – not damage – long-term prosperity. Furthermore, the reforms have also brought benefits in terms of the distribution of the costs and benefits of finance. The removal of the implicit taxpayer subsidy transfers the costs of excessive risk taking to private creditors and away from the taxpayer. And by making resolution of failing institutions a real possibility and facilitating smooth exit, the reforms will also promote competition. Before the crisis, the largest and most systemic firms enjoyed the largest subsidies. Now, over time, the absence of that subsidy will create a level playing field, transferring the benefits of finance to customers and clients. These benefits will accrue slowly over time. Indeed, they may never be obvious to many who don’t recall a different world. That is why it is vital that our sons and daughters are taught not that financial crises are inevitable, but that they are both avoidable and tremendously costly for jobs, growth and prosperity. The lessons of the crisis need to be learned and handed down to future generations in order that the next phase of reform is sustained. Those reforms have the potential to make finance more effective in serving the real economy. A more diverse financial system can be both more resilient and more effective.