First, as we learned 10 years ago, we need to look at how the system as a whole has performed under stress and whether and how it might be strengthened. Focussing on the resilience of one or another element without understanding its broader effect will give us a false picture. Second, such a comprehensive assessment, cannot be done by one jurisdiction or one international standard setter. And in this respect, one of the other, major planks of the post financial crisis reforms, the creation of the international Financial Stability Board (FSB) – has put us in a far better position than ten years ago. The FSB has been active and in crisis mode from the outset of this crisis. It has enabled jurisdictions and international standard setters to work together, under its umbrella to share experience, to assess risks to financial stability, and in to discuss ‘what works’ (and what doesn’t work) in addressing those risks. The FSB’s assessments also provide input to the political level of the G20. And to ensure national authorities respond in a consistent way, the FSB agreed Principles, adopted by the G20, which reiterate commitment to common international standards, using their inbuilt flexibility including buffers, while leaning against regulatory rollback. Going forward, and just as after the global financial crisis, the FSB can and should enable us to bring together the various perspectives in the central bank and regulatory communities to determine whether we do indeed need more resilience in the system and, if so, how to achieve it.

Within the investment fund universe, we need to look at the related question of whether actual or prospective redemption requests generated additional pressures for funds invested in illiquid assets, how well liquidity management tools operated under stress and whether we saw any emergence of first mover advantages that could have created ‘run’ dynamics. One important element in the amplification of liquidity pressure appears to have been the unwinding of large positions in interest rate markets, particularly US Treasuries, by very highly leveraged hedge funds. These funds can help to stabilise market prices in normal times by arbitraging small differences that open up between the value of derivatives and the value of the cash instrument on which the derivative is based. In March, however, these highly leveraged funds appear to have become an amplifier of stress. Sharp changes in government bond prices, margin call and inability to rollover funding forced substantial sales of government bonds by these players (almost $ during March) which in turn generated further falls in government bond markets. Moves in government bond prices generated margin call liquidity pressures on pension funds and insurance companies adding to the pressure on core funding markets. See, for example, previous Financial Stability Reports, or the Financial Stability Paper No. 42 “Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds” 13  11  All speeches are available online at www.bankofengland.co.uk/news/speeches  11  I have mentioned the role of margin in providing resilience against counterparty credit risk.