this later on. but, unlike in banking, for most firms involved in market - based finance leverage is not at the core of the business model. and leverage, or the lack of it, affects liquidity risk as well as solvency risk. in a crisis, when credit is constrained, the unwinding of leverage and the threat of insolvency drives fire - sales of assets which amplify financial stress. unleveraged investors may of course still run if asset prices fall, but they are not forced to do so by the withdrawal of credit. historically, when faced with deteriorating financial asset markets, investors in retail funds, insurance companies and pension funds have on the whole tended to stick fast and run their losses. peak outflows from european investment funds investing in investment grade corporate bonds in the crisis were no more than 5 % in a month. large scale losses to investment funds, insurance companies and pension funds can present very difficult issues and strain the financial system, especially through their knock on effects on other parts of the system. but in and of themselves, they have been less likely to lead to systemic failure compared to major stress in the banking system that provides not just credit but the means of transaction – i. e. the money itself – in our economies. empirical work supports this. see for example, allard and blavy ( 2011 ) : “ market - based economies experience significantly and durably stronger rebounds than the bank - based ones ( in particular the more bank - based economies of continental europe ). ” carney in contrast, at northern rock over the second half of 2016 retail and wholesale deposits each fell by nearly 60 %. all speeches are available online at www. bankofengland. co. uk / speeches in a major crisis, market - based finance might therefore be expected to be a materially less disruptive way of passing very substantial losses back to end investors than bank lending. this is particularly true in the case of international capital flows where bank lending across borders, particularly short term inter - bank lending, can create an explosive channel of transmission of systemic risk from one jurisdiction to the next if banks do not have the resilience to absorb major losses and authorities are not able to resolve them safely if they fail. it is no accident that the ecb identified market - based finance as an important risk sharing mechanism between euro area countries and encouraged the development of an eu capital markets union. risks in market - based finance i have noted the

thinking about ‘ what might happen ’, to question whether the past remains a good guide to the future. funds now encompass a broader spectrum of investors and invest in a much broader range of markets and products. the bulk of flows into funds since the crisis have been into funds invested in less liquid debt instruments and, due to the search for yield, in the riskier parts of the market. in this respect, given market news in recent days, it is worth noting the selling of volatility by asset managers – including it would seem to retail investors. the liquidity risk is amplified by a number of factors. funds investing in less liquid instruments have grown quickly at the same time as market liquidity has gone in the other direction. market liquidity, particularly in dealer intermediated markets is lower than in the decade before the crisis. banks ’ risk appetite and business models have changed and regulation has ensured that they are adequately capitalised for the risks they run as market makers. in 2015 the bank of england and financial conduct authority conducted a joint information - gathering exercise on 17 asset management firms and 143 of their funds, focusing on those with large holdings of corporate bonds. one key finding was that funds individually were assuming more liquidity than might be available if there was market - wide selling pressure. for example, in the dollar corporate bond market, funds ’ individual expectations of what could be liquidated in a day, when aggregated together, was three times daily market turnover. the risk of sharply falling markets triggering large - scale redemptions is exacerbated by the fact that many retail funds offer investors daily liquidity, regardless of the nature of the fund ’ s investments. individual funds do of course have a variety of mechanisms – ‘ gates ’, penalties, discounts, suspensions, etc – to help manage large - scale redemption pressure. but in an episode of severe market stress, it is not at all clear whether activation of such mechanisms by funds under stress would dampen rather than amplify redemption pressure across the market more generally. for example, foreign currency debt securities were at the heart of the latin american debt crisis in the 1980s in which bond investors played a significant role in volatile capital flows and ultimately in sovereign crises. recent bank research shows that during the 2013 ‘ taper tantrum ’ asset managers sold bonds as prices fell, perhaps exacerbating the episode. see czech and roberts - sklar ( 2017 ). whilst price - based measures of liquidity in fixed - income