But the growth of the more opaque version of these products marks them out, and unmonitored excess could compromise these markets in the future. Recent history is rife with examples of where over-exuberance has led to opacity, severe market difficulties and financial instability (e.g. the rise of CDO2 in the securitisation markets). In such cases, the costs of collapse can easily outweigh the previous benefits. It is important that the authorities monitor the ETF industry and make sure that market participants understand the risks they may be running. It is for that reason that the interim FPC advised the FSA last week that its bank supervisors should monitor closely the risks associated with opaque funding structures, such as collateral swaps or similar transactions employed by ETFs. http://www.bis.org/publ/work343.pdf, http://www.financialstabilityboard.org/publications/r_110412b.pdf and the IMF’s Global Financial Stability Report (http://www.imf.org/External/Pubs/FT/fmu/eng/2011/02/pdf/0611.pdf) respectively). BIS central bankers’ speeches  11  Regulatory responses The financial crisis exposed a need to not just strengthen but to completely re-design aspects of financial regulation, to try to find a solution to “too big to fail” problem and hence minimise the chances of something similar happening again (if financial institutions could fail without large spillovers then much other regulation might be unnecessary). The resulting regulatory agenda is formidable – including agreeing the detailed rules supporting Dodd Frank in the US; EMIR and Solvency II in Europe; the new Basel rules on capital and liquidity including the SIFI surcharge internationally; the final outcome of the ICB in the UK; various FSB initiatives and many more besides.

Indeed, recent MI has suggested that there has been some direct lending  9  And although the aggregate US corporate sector cash position is strong, it is likely to mask significant heterogeneity in the distribution of firms, with a disproportionate share of the cash held by the largest investment grade businesses. 8  BIS central bankers’ speeches  activity to mid-sized corporates in the UK by non-bank institutions such as dedicated loan, private equity and pension funds (although the absolute amounts are still very small). Chart 13  Chart 14  Issuance of sub-investment grade corporate debt by region(a)(b)  Corporate bond valuation measure(a)(b)  Sources: Dealogic and Bank calculations. (a) Emerging economies includes Africa, Caribbean, Indian subcontinent, Latin America, Middle East, North Asia and South East Asia. “Other” includes Australasia and Japan. Includes issuance in all currencies. (b) 2011 data are to 3 June 2011  Sources: Bank of America Merrill Lynch, Bloomberg, Thomson Reuters Datastream and Bank calculations. (a) Shows the difference between actual and estimated equilibrium spreads as a percentage. Positive numbers represent overvaluation, negative numbers undervaluation. (b) Equilibrium corporate bond spreads are defined as the total estimated credit component plus a five-year rolling average of the illiquidity premia. Full details of the approach used for the decomposition of corporate bond spreads can be found in Churm, R and Panigirtzoglou, N (2005), “Decomposing credit spreads”, Bank of England Working Paper no. 253.