Moonwalking bears and underwater icebergs: Hidden risks in markets Speech given by Alex Brazier, Executive Director for Financial Stability Strategy and Risk, Bank of England  London Business School Asset Management Conference 2018 Thursday 26 April 2018  I am grateful to Yuliya Baranova, Johnny Elliot, Dan Gray, Sonal Patel, James Smith and Nick Vause for their assistance with preparing the speech and accompanying slides. This speech draws heavily on: Brazier, A. (2018), ‘Market finance and financial stability: will the stretch cause a strain’, Brevan Howard Centre for Financial Analysis, Imperial College Business School, London, February, available here; Cunliffe, J. (2018), ‘Market-based finance: a macroprudential view’, Asset Management Derivatives Forum, Dana Point, California, February, available here. 1  All speeches are available online at www.bankofengland.co.uk/speeches  Moonwalking bears and underwater icebergs: Hidden risks in markets The theme of today’s session is hidden risks. Since this is the Investment Management Club, I want to focus on hidden risks in markets. In my view there are generally two types of such hidden risk. Let’s call them bears and bergs (slide 2). The bears are the risks that hide in plain sight. These are risks that, after the event, are obvious. Some people are able to see them in real time. Others, because of very human traits, don’t. They are the moonwalking bear in the viral Transport for London Cyclist Awareness video. For those who haven’t seen it, amidst a frenetic basketball game, a person dressed as a bear moonwalks across the screen.

This change is partly the result of the rapidly growing economies in Asia , which has created a large and expanding cumulative export market. This economic integration is also the result of Asia's participation in the globalization of production. These trends have led to greater diversification of economic activity in the region and a reduction in the over-concentration in the traditional export markets. In the area of investment, Japan has for several decades been a major foreign direct investor in the Asian region. A more recent phenomenon is the more widespread cross-border investment undertaken in the region to capitalise on the growing opportunities arising from the diversity of economic strengths in the region. These developments have increased the potential for Asia to be an important engine of growth in the global economy. The advancement that has been achieved in the increased economic integration needs to be reinforced by greater financial integration. Accelerating the regional financial integration process would serve as a powerful impetus, not only for reinforcing the trade and investment inter linkages, but more importantly to facilitate a more efficient international allocation of capital. In so doing it would contribute towards unlocking Asia's full potential in the global economy. Indeed, such greater financial integration would also play an important role in facilitating the allocation of some part of Asia's surplus funds into productive investments within the region. The more effective and efficient recycling of funds within the region will help reduce financing costs, stabilize financial prices, and increase the potential for the diversification of risks.