their strength is that they target the problem directly at the root. slide 7 summarizes the two main dimensions of systemic risk : the “ structural ” dimension, which covers the possible risks associated with individual institutions whose failure would endanger the entire system ; the “ cyclical ” dimension refers to systemic risks which are not directly linked to an individual institution, but which stem from financial institutions ’ collective responses to business or financial fluctuations and adverse shocks. “ structural tools ” strive to reduce the impact of institutional failure by strengthening individual institutions. their potential utility is often cited with regard to institutions which are considered “ too big to fail ” or “ too interconnected to be liquidated ” and whose failure would impact the entire system. “ countercyclical tools ” aim to address the cyclical dimension of risk by reducing feedback loops. as slide 8 shows, these are designed to counter problems associated with the actions of individual financial institutions, which can lead them all to act in the same way after an initial shock, thus amplifying the initial movements of the markets and leading to a new wave of similar reactions. 19 this is because individual financial institutions tend to react to a shock by shedding risks, either because it is rational to do so or because regulation oblige them to do so. if the system is not designed with the explicit aim of stopping such movements, a negative cycle can set in with dangerous consequences for individual institutions and the system as a whole. countercyclical measures are intended to modulate, reduce and potentially prevent such instability. the aim of “ capital buffers ” is to ensure that, in good times, banks acquire capital base that is well above the minimum. the buffers can then be released in more difficult times, allowing financial institutions to absorb substantial asset price falls before legal constraints become binding. they should thus help avoid the mentioned pro - cyclical behaviour that typically leads to so - called “ fire sales ”. what is appealing in theory is not necessarily easy to implement in practice. few doubt that there are challenges to defining and calibrating the indicators used to determine when capital buffers should be triggered, and by how much. however, to quote borio, “ while calibration is assenmacher - wesche and gerlach ( 2010 ). hott and monnin ( 2008 ). for examples of models which illustrate downward spirals, please refer to markus brunnermeier and lasse pedersen ( 2009 ), stephen morris and hyun

withdraw their funds from the bank. in the case of the repo market, lenders raised the haircuts required for the repo loans or refused to roll over the repo loans collateralized by subprime mortgage assets. this is equivalent to a partial or a complete withdrawal of funds from the market by the lenders. 13 in addition, the higher haircuts forced the owners of the assets to come up with additional cash which typically meant that they were forced to sell assets. given that there was little appetite to purchase mortgage - related assets, high - quality assets had to be sold in order to raise this cash. this put downward pressure on the prices of these assets and increased the uncertainty regarding their future values leading to demands for higher haircuts on these assets, as well. the haircut spiral, can be seen in chart 6. a fire sale dynamic developed, which depressed asset prices further leading to additional upward pressure on haircuts. the rapid deleveraging of the shadow banking system as the run progressed led to a sharp contraction in credit. we saw this earlier in chart 2 with the near complete collapse in the asset - backed security market. banks were also adversely affected by this run on securitization markets since they used these markets as well to fund many types of loans. several banks had to bring onto their balance sheets previously off - balance sheet entities that they had used to securitize loans. this used up balance - sheet capacity making it more difficult for banks to make up for the credit contraction going on outside of the banking system. the problems in the financial system spread to the real economy. when lehman brothers declared bankruptcy, a money market mutual fund – the reserve fund – “ broke the buck ”. the unanticipated losses incurred by the reserve fund expanded the bank run to the money market mutual funds. since these funds were significant investors in the commercial paper market, this transmitted the strains to the commercial paper market. dollar funding pressures were also increasing for firms operating outside the united states as their ability to access dollars through the foreign exchange markets began to become strained. the an overnight repo loan as compared with a longer term repo loan is the closest in nature to a demand deposit. see tobias adrian, christopher burke and james mcandrews. 2009. “ the federal reserve ’ s primary dealer credit facility ”. current issues in economics and finance 15, no. 4 ( august ). gary gorton. 2010. “