of economic downturn, then they may all react similarly to a given shock. this could itself amplify market movements and trigger liquidity difficulties, despite the best intentions. there is also the question of legal certainty. if counterparties doubt an institution ’ s strength or solvency, their behaviour may be influenced if they feel that complex and untested types of contract may not “ close out ”, particularly in adversity. such concerns lay behind the ltcm crisis in 1998. counterparties feared ltcm might be insolvent. they could sense a drain of liquidity from ltcm which might precipitate collapse. if collapse occurred, the vast array of complex contracts within ltcm might not close out. the dimensions of the exposures were considerable, and a disorderly run on ltcm, triggered in part by a lack of legal certainty, could well have provoked a serious liquidity situation. no surprise that there was a co - ordinated purchase by the main creditors to enforce an orderly wind down. a key lesson for financial stability oversight is the need to encourage ways of improving legal certainty. 7. implications of the new environment : risk and culture so much for the drivers of change - liberalisation ; technological advance and new products. but what about the implications for the financial markets and their oversight? the first implication is to highlight the need for examination and possible change in supervisory and regulatory frameworks. what made sense before, in terms of separate regulation for each silo of banking, insurance and securities might look different today. we have also certainly seen a move towards consolidated supervision. i will return to this area later. but second, oversight needs an understanding of a number of different soft issues : of culture and attitudes to risk which can affect behaviour. these can and do vary across the different areas of activity. the existence of new concentrations of risk might not matter if their new holders are fully aware of the risk implications, or if their likely behaviour could be anticipated by other financial participants or the public authorities. but new holders of such risk may not have the same understandings of what the risks consist of, as those who generate them. and accordingly they may behave in unexpected ways when shocks arise. for example in banking, confidence in the liquidity of the system and expected behaviour is underpinned by the presumption that, in the absence of a credit event, obligations will be honoured at a known time and date. this would typically beon the expiry

fund issue, the nickel metals case – namely that for firms to understand and respond to the 4 / 6 bis - central bankers'speeches full risk implications they would have had to observe and respond to a much larger picture of risks than they did observe, and from that came potentially larger risks. there is a challenge of breadth and depth in the nbfi world. it is a very large and disparate landscape with many activities and entities. as a result, we have to survey a lot of ground to look out for risks. but in order to understand these risks, we need to get into the detail, hence the depth issue. ldi was a good case study of this. the ldi fund world comprised 85 % of the larger so - called segregated funds, and 15 % of the smaller pooled funds. our stress testing work focussed on the 85 %, but the problem arose in the 15 %. in some ways the issues around nbfi bear a striking resemblance to ages old challenges in finance, such as leverage, and inter connectivity with other parts of the financial system, creating the scope for spill - overs and systemic consequences. but the heterogeneity of the landscape means that there is no single magic number for leverage as we have with banks, and the inter connectivity can be hard to map, reflecting the recent incidents. this helps to explain why at the bank of england we are conducting a system wide stress exercise involving non banks as well as banks to help us to map out the risks. this is inherently a cross - border issue. so, we must make progress internationally. this is what the financial stability board work programme is focussed on, and why it is so important. it is also crucial that individual countries take forward and implement these reforms. while the solutions are global, delivering them will necessarily be local. finally, there is an important point to pull out of a number of these issues. a common outcome of a shift in the balance from inside to outside money ( either through cbdc or banks holding larger reserves at the central bank ) or increasing the broader liquidity buffers of banks and non - banks could be to create a constraint on lending and investment in the real economy. for the uk economy this would go against the need to finance investment to support stronger potential growth, from its current weak level. this constraint would not appear if the counterfactual was an unstable financial system because solving that instability would have to be the priority. but in