##ormity of the economic shock. but weaknesses in the non - banking part of the financial system made matters worse. the fsb carried out a thorough review of the march market turmoil. it was published last november and i recommend you read it. as the review showed, liquidity mismatch, interconnectedness, and sudden changes in expectations, those systemic risk factors that i mentioned earlier, again played a key role in propagating the initial shock. it seems that over time, investments in money market funds and open - ended funds came to be seen by investors as just as liquid and safe as cash. as doubts started to grow about the ability of these funds to liquidate their assets on demand, investors wanted to be at the front of the redemption queue. in other words : as it emerged that these funds had a liquidity mismatch without the buffers to sustain it, a stampede was triggered that was in essence not so different from the classic bank runs we saw in the 1930s. next, the march events highlighted the dependence of the system on readily available liquidity. if liquidity strains emerge, in money market funds and open - ended funds, through margin calls and in core bond markets, vulnerabilities spread quickly through the financial system. one of the important post - crisis reforms i mentioned earlier, was the greater use of margining and central clearing through the ccps. thanks to this, the market stress did not result in widespread concerns about counterparty risk – as we saw in 2008. but violent price swings in financial markets translated into margin calls that may have been larger than expected. this put sharp liquidity pressure on those on the wrong side of derivatives exposures, adding to demand for liquidity in the system. all this should not surprise us. money market funds already played a crucial role in propagating the initial shock of lehman ’ s collapse in 2008. maybe you remember the speech that paul 3 / 4 bis central bankers'speeches volcker gave at a nabe conference in 2013, when accepting the lifetime achievement award for economic policy. on that occasion he expressed his concern about the weaknesses in the regulation of money market funds. with the financial reform agenda after 2008 being heavily focused on banks, and much less so on non - banks, vulnerabilities in the financial system moved from the banking sector to the nonbank financial sector. this is what i call the ‘ waterbed effect ’. pressing down on one end of the financial system will cause

klaas knot : rebuilding resilience - the financial system after the covid crisis keynote address by mr klaas knot, president of the netherlands bank, before the international symposium of the national association for business economics, 11 may 2021. * * * it ’ s an honor to speak at this international symposium of the national association for business economics. i think we all share a fascination for economics here. having worked in academia, the imf, the dutch finance ministry and the central bank, i live and breathe economics. so i feel very much at home here. “ my friends, i want to talk for a few minutes with the people of the united states about banking. ” so began, on march 12, 1933, the first of about thirty fireside chats that president roosevelt delivered over the radio. it was eight days after his inauguration. he had spent his first week coping with an epidemic of bank closures that affected households in every state. three days after closing down the entire american banking system, congress passed the emergency banking act. roosevelt used it to create federal deposit insurance when the banks reopened. that sunday night, on the eve of the end of the bank holiday, roosevelt spoke to a radio audience of more than 60 million people. he told them in clear language “ what has been done in the last few days, why it was done, and what the next steps are going to be. ” the result was a remarkable turnaround in the public ’ s confidence. since this, almost iconic, banking crisis of 1933, we have seen financial crises in all shapes and sizes throughout the world. and now, the covid crisis poses yet a new challenge to the financial system. how has the financial system stood up to this latest test? and what can we learn from it for the future? these are the questions i want to address with you today. first, i will reintroduce you to the concept of systemic risk. i will argue that this has been the primary ingredient in financial crises throughout history, from 1933 to the 2008 global financial crisis. i will then discuss what governments and regulators have done to strengthen the financial system. i will explain how the financial reforms of the past ten years helped to cushion the impact of the covid crisis, especially in the banking sector, but that systemic risk revealed itself in other parts of the financial system. i will end by discussing how we can address these new vulnerabilities in the financial system and strengthen its overall res