by jon cunliffe, financial system resilience : lessons from a real stress, 9 june 2020. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice simultaneous default of the two largest banks that use them. in other words, ccps had enough resources at all times to cover two defaults of institutions like lehman. evidence from march and april suggests that, when it comes to preventing panic driven by opaque and complicated interlinkages of exposures, the simpler system is working. there were unprecedented market moves. but no spaghetti bowl. no widespread panic about who had exposures to whom, and whether they could pay. there ’ s a catch of course. as we think about where we go from here, we will also need to look at ccps ’ role in the performance of system as a whole. indeed one of the key lessons of the 2008 financial crisis was that feedback loops and interlinkages mean the system is not the sum of its parts. 6 i will come back to this. 2. global as we turn to that bigger question, however, we should not lose sight of the fact that the reforms we put in place to make the system simpler served their intended purpose. the question now is how to sustain and strengthen this new simpler system. i have two answers : first of all, keeping the spaghetti bowl untangled means global infrastructure. the deep pools of liquidity that make central clearing economical don ’ t correspond to national borders. derivatives clearing is a global service. uk ccps clear global markets for interest rates, foreign exchange, credit default swaps, and commodities. foreign clearing members make up 63 % of the clearing members at speech by alex brazier. how to : macropru. 5 principles for macroprudential policy. 13 february 2017. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice uk ccps. at the end of 2020 there were £60 trillion of derivative contracts between uk ccps and eu clearing members, and £66 trillion between uk ccps and us clearing members. 7 the growth of global infrastructure that spans national borders is a direct result of the reforms we put in place after 2008 – again a feature not a bug. this cross - border nature of clearing means that there must be a consistent approach for the regulation and supervision of cross - border ccps

##judging risks. but when a shift in risk appreciation and pricing occurs, the reinsurance industry often separates the run off of old portfolios containing mispriced contracts from the establishment of new vehicles, capitalised separately to take advantage of attractive terms on new business. and for regular insurance, many contracts are annual, so adversely priced business can run off fairly quickly. banking typically works quite differently. banks around the world are carrying portfolios of term loans that are the legacy of the boom years. there is uncertainty – amongst banks ’ management, shareholders and funders – about the degree of fundamental impairment in those portfolios. new loans are booked to the same balance sheets. and so many banks face a choice between, on the one hand, conserving capital and liquidity to support legacy portfolios ; and, on the other hand, deploying capital and liquidity to write new business on what some see as the attractive terms and conditions now available. the banking system simply is not structured routinely to insulate new business from the legacy of past mistakes ; funding and capital are fungible. this predicament may be exacerbated by other features of the current environment. one is an apparent reluctance on the part of banks to raise fresh capital except where the market thinks that it is beyond doubt that they need to do so. given the feedback from credit conditions to asset prices and the real economy and so potentially to banks ’ future earnings, it might seem slightly odd for banks internationally to be maintaining distributions to shareholders but tightening credit availability in order to preserve resources. this has to be seen in the wider context. one possible explanation for banks holding back from raising fresh capital is that they may want to avoid giving an adverse signal about themselves. if there is a co - ordination problem, the regulatory authorities internationally should be able to tackle it, allied to ensuring prudent valuations of legacy portfolios. but another possible explanation is that, like some other market participants, bankers may believe that many legacy assets are fundamentally undervalued at present and that the markets for securitised assets will, with time, recover and reopen. on that view, banks are avoiding becoming overcapitalised on a fundamentals ( or forward looking ) basis, and so setting off another expansionary phase in the credit cycle, a little further down the road. the serious puzzle which that underlines is why there is a dearth of buyers for the supposedly undervalued paper.