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.

The baseline assessment would include the environmental risk of a bank’s lending and other businesses. In this Phase, the HKMA will need to work with the industry to develop a ___ (a) common framework, drawing on the latest international standards and best practices. The HKMA will also, in collaboration with the relevant international bodies, such as the International Finance Corporation (IFC), provide capacity building and training programmes to banks in Hong Kong for better understanding of the green principles and methodology in undertaking the baseline assessment. Phase II – once we have completed the baseline assessment of banks in Hong Kong in Phase I, the HKMA will engage the industry and other relevant stakeholders in a 1/3  BIS central bankers' speeches  (b) consultation on the supervisory expectation or requirement on Green and Sustainable Banking going forward. The key objective of this Phase is to set tangible deliverables for Hong Kong’s banking industry to become “greener” and “more sustainable”. Phase III – once the deliverables have been set, the next Phase is Implementation, (c) Monitoring and Evaluation. The success of this Phase depends crucially on appropriate measurement of the “greenness” of the banks and the timely disclosure of progress or the lack of it. 4. With the support of the banking industry, I expect Phase I could be completed within around 12 months’ time from now. Responsible Investment 5. In the past few years, there has been a significant shift in mind-set amongst asset owners on Green and ESG investments.