philip r lane : a better understanding of the geography of risk will help us assess the financial stability implications of market - based financing address by mr philip r lane, governor of the central bank of ireland, at the international capital market association conference, dublin, 19 may 2016. * * * introduction i welcome the opportunity to speak at the 48th icma conference. a focus on capital markets is timely, given the widespread consensus that europe would be better served by a more balanced financial system, in which financial markets play a larger role and provide alternative channels to banks in a range of financial intermediation activities ( european systemic risk board 2014 ). this basic message drives the agenda for capital markets union ( cmu ) in europe, which is supported by the central banking community ( central bank of ireland 2015, european central bank 2015 ). an enhanced role for market - based finance has the potential to foster greater risk diversification, while also enhancing financial stability by limiting the fallout from banking crises. as a mechanism for individuals and institutions to obtain access to a diversified pool of financial assets and a key investor base for corporates seeking to obtain market - based funding, the investment funds sector plays an especially important role. in what follows, i focus on the role of investment funds in the intermediation of international financial flows. of course, the investment funds sector is extremely diverse. among the key differences in the design and operation of funds are : equity versus debt ; leveraged versus long - only ; level of liquidity ; ease of redemption ; actively - managed versus passive index - based ; geographic scope ; maturity horizon ( with money market funds focusing on the short end and infrastructure funds orientated at the long end ) ; use of derivative products for funding and asset allocation ; type of funding ( retail ; asset - backed securitisations ) ; and ownership structure ( hedge funds, mutual funds, special purpose vehicles ). the facilitation of equitytype investments is critically important in view of the risks associated with an excessive reliance on debt funding. at the same time, market - based debt funding provides an important alternative to bank - based debt funding, with multiple funding channels a key element in the design of a resilient financial system. it is also important to recognise the inter - connections between market - based and bankbased funding channels, with the banking sector itself dependent on financial markets to raise equity and different grades of bond funding, while also relying on securitisations to release tranches of performing and

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