their leverage by keeping the underlying assets off their balance sheets. clearing banks stand in the middle of triparty repo agreements, managing the exchange of cash and securities while providing protection and liquidity to both transacting parties. moreover, to ease operational frictions, clearing banks extend very large amounts of temporary intraday credit to borrowers and lenders each day. this temporary intraday credit – averaging about $ 1. 4 trillion – allows securities dealers access to their securities ( for example, the tranches of loan securitizations mentioned earlier ) during trading hours. because of these and other connections, panics and other stresses in shadow banking can spill over into traditional banking. indeed, the markets and institutions i mentioned – the repo market, the abcp market, and money market funds – all suffered panics to some degree during the financial crisis. as a result, many traditional financial institutions lost important funding channels for their assets ; in addition, for reputational and contractual reasons, many banks supported their affiliated funds and conduits, compounding their own mounting liquidity pressures. status of shadow banking reform efforts given the substantial stakes, i am encouraged that both regulators and the private sector have begun to take actions to prevent future panics and other disruptions in shadow banking. however, in many key areas these efforts are still at early stages. a first set of reforms relate to the accounting and regulatory capital treatment of shadow banking entities sponsored by traditional banks. the financial accounting standards board finalized a rule in 2009 that requires securitizations and other structured finance vehicles, in certain situations, to be consolidated onto the sponsoring bank ’ s balance sheet. in the context of regulatory capital, basel 2. 5 and basel iii addressed interconnectedness and other sources of systemic risk frequently associated with shadow banking by raising capital requirements for exposures to unregulated financial institutions, such as asset managers, hedge funds, and credit insurers, and by strengthening the capital treatment of liquidity lines to off - balance - sheet structures. basel iii also includes quantitative liquidity rules that reflect contractual and other risks that arise from bank sponsorship of off - balance - sheet vehicles. a second area of ongoing reform is money market funds. in an important step toward greater stability, the sec in 2010 amended its regulations to, among other things, require that money market funds maintain larger buffers of liquid assets, which may help reassure investors and reduce the likelihood of runs. notwithstanding the new regulations, the risk

account deficits of about 4 percent of their gdps. however, according to these historians, capital flows to the emerging market countries of today have been somewhat more variable – as measured by the standard deviation of the current account to gdp ratio – than those provided to the “ emerging market economies ” of the late 1800s and early 1900s. while the pre - 1914 period can be characterized as more stable in some respects, economists have identified other important differences between that period of global capital flows and our own. first, gross flows are far greater today. a second difference is in the composition of the investment. while data are not complete, it does appear that the bulk – possibly as much as 85 percent according to bordo, eichengreen and kim, was there really an earlier period of international financial integration comparable to today? national bureau of economic research working paper 6738, september 1998. estimates reported by bordo, eichengreen and kim – of pre - 1914 investments were in government and municipal securities, railways, resource - extraction companies and public utilities. today, it is safe to estimate that a larger proportion of investments are in commercial, industrial and financial concerns, whose assets are more intangible and whose operations are less transparent. third, prior to 1914, the vast majority of portfolio capital flows took the form of bonds. more recently, portfolio flows have been more evenly split between bonds and stocks. lessons for policymakers policymakers need to understand this earlier stage of global capital flows and should attempt to adapt any lessons to today ’ s world of absolutely large, very liquid, and fundamentally less transparent crossborder capital flows. the core question, obviously, is what factors allowed the apparent persistence and relative stability of the pre - 1914 era of capital flows? one theory advanced by academics is that capital exports and investments went largely to countries linked through shared language, culture, legal systems and accounting regimes. another hypothesis may be that, in the period leading up to world war i, the commitment of policymakers to stable monetary and fiscal policies was highly credible to market participants, perhaps reflecting a shared belief in and commitment to the gold standard. the policymakers ’ challenge today is to build strong institutional structures, policy credibility, and private sector discipline that are at least as strong as might have existed earlier. however, we must do so against a background of modern, technologically driven, global finance. it is clear that we must make the adjustments required because, with the absolute scale of global financial markets increasing