In parallel, a “run on repo”, triggered by increased haircuts on collateral to guard against counterparty risk, pushed the shadow banking sectors in advanced economies to collapse. In the euro area, the sovereign debt crisis compounded these problems, causing some markets to splinter along national lines. Global reforms address the fault lines that caused this fiasco. New global standards for liquidity regulation are now in place including the Liquidity Coverage Ratio and Net Stable Funding Ratio. Bank capital standards now take into account exposures to shadow banks, including step-in risk, and through-the-cycle margining prevents Minsky cycles in secured lending. 1 2  See https://www.fsb.org/wp-content/uploads/R191118-1-1.pdf. See https://www.esma.europa.eu/sites/default/files/library/esma50_157_2025_asr_derivatives.pdf. 3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  These reforms are transforming banks’ approach to liquidity management and building the resilience of the system as a whole. For example, liquid assets – relative to liabilities that can readily run – are tenfold higher than before the crisis. However, the recent volatility in US dollar repo markets suggest there are still frictions that need to be addressed. Contrary to expectations, banks did not step into the market to lend cash, viewing the profit opportunity to be insufficient to offset the impact on perceived regulatory liquidity requirements. The Federal Reserve’s open market operations have since calmed the market, but term repo rates remain elevated, as dealers are pricing in a higher likelihood of similar spikes in future.

Addressing their root causes required stronger banks, a more resilient financial system, solvent governments, and the delinking of bank and sovereign credit risk. On the two of these imperatives, the EU has made welcome progress, with the establishment of the Single Supervisory Mechanism and the European Systemic Risk Board. These bodies are helping address a classic collective action problem by overcoming the inevitable temptation of national supervisors to ringfence liquidity and capital within national boundaries to the detriment of a single market for capital. Alongside improving the transmission mechanism, the ECB made important advances in the conduct of monetary policy. It has reduced the effective lower bound on policy rates and created additional stimulus through forward guidance, new lending facilities and innovative asset purchase programmes. These actions have helped shape the expectations of both market participants and the general public. The challenge now facing the ECB – and monetary policy makers more broadly – is to provide sufficient stimulus to meet its price stability objective when powerful structural forces are pushing down equilibrium interest rates. As I noted at Jackson Hole,3 the risk of a global liquidity trap puts a high premium on getting more than just monetary policy right. In a global liquidity trap, central banks cannot be the only policy makers who do “whatever it takes.” There are clear gains from coordination, with other policies – particularly fiscal policy – having important roles. The biggest gains would come from lowering trade tensions.