most complex potential regulatory arena concerns leverage in the hedge fund industry. extreme levels of leverage are an obvious source of concern for central banks in light of the credit risk nexus between hedge funds and the global banking system. this credit risk nexus could become particularly precarious if a large scale credit crisis were to coincide with a global capital market liquidity crisis. regulatory initiatives directed at assessing the degree of leverage in the hedge fund industry should therefore not be dismissed ex ante. i. e. the value of the positions as a multiple of the equity value. nonetheless, meaningful efforts to measure leverage in the hedge fund industry are bound to be undermined by complex aggregation problems not dissimilar to those prevalent in the arena of position reporting. misguided regulatory initiatives will fail to accomplish what they set out to do and thus undermine the credibility of regulation. ineffective regulation can ultimately undermine the competitiveness of financial centers. these problems notwithstanding, the question of leverage in the hedge fund industry deserves further study. the primary focus should continue to be directed at the risk management operations and processes of the world ’ s major investment banks. they are the primary trading partners of the hedge fund industry. they are also the most important providers of leverage to the industry. since the ltcm crisis, the global investment banks have clearly strengthened their risk management operations. on the other hand, the hedge fund business has become a significant source of profit for the big banks. competition in providing lending and brokerage services to the hedge fund industry is fierce. some erosion of lending standards is a likely consequence of such an intensely competitive environment. in light of the previously discussed difficulties in measuring leverage, senior bank executives, risk managers and bank supervisors should be particularly vigilant in ensuring disciplined lending frameworks, fierce competition notwithstanding. if the leading global investment banks maintain adequate counterparty risk and liquidity risk management systems and operations, leverage in the hedge fund industry should represent but a marginal risk to the stability of the global financial system. fortunately, the global investment banking community is a small and concentrated one. moreover, adequate bank supervisory structures exist and are currently being modernized. this should facilitate further study of the nexus between the risk taking of individual hedge funds and the risk management systems and processes within the world ’ s most important financial institutions. conclusions free of narrow constraints embedded in traditional investment guidelines, hedge funds have been an important source of innovation in the asset management industry. lucrative compensation structures have played an important role in attracting talented individuals to the industry. admitted

as stocks, bonds and real estate lose value, and also second, because taxpayer money has to be used to rescue banks. financial crises occur when risks are underestimated and price expectations of investments are exaggerated. this can lead to credit and asset price bubbles which sooner or later burst. when banks do not hold enough equity capital to absorb the losses they incur, they fail. sovereign money would do nothing to change this situation. risks can be underestimated and future returns overestimated in a sovereign money system too. even without recourse to sight deposits, banks can grant loans which are too risky, hold too few provisions for times of crisis and become insolvent if a bubble bursts. moreover, a key problem in the financial crisis was banks ’ heavy reliance on short - term financing from the money market. these interbank loans proved to be a less stable source of financing than private customers ’ sight deposits ; in fact they dried up at the very start of the financial crisis in 2008. sovereign money would not help to eliminate this risk of instability either. there are other, far more effective approaches to stave off credit and asset price bubbles than sovereign money. the significant increase in the capital and liquidity requirements for banks in the aftermath of the financial crisis is one such approach. macroprudential tools such as the countercyclical capital buffer are an additional means of strengthening our financial system. but a liberal economic system entirely devoid of crises is an illusion. to prevent crises altogether would ultimately mean to constrain the economy to such an extent that our prosperity would be significantly impaired in the longer term. however, it is possible to limit macroeconomic risks to an acceptable level using appropriate regulatory measures. this is where we have directed our efforts since the financial crisis and we are continuing to work closely on this with other parties at national and international level. ‘ debt - free ’ payments to the confederation, cantons or citizens the initiative is likewise not able to deliver on its second promise to reduce the burden on citizens through ‘ debt - free ’ payments by the snb to the confederation, the cantons or the people. although ‘ debt - free ’ payments seem attractive at first glance, they will not bring any financial benefit to the people in the long term, despite what the initiative ’ s authors would have us believe. a sovereign money system will not turn the snb into a cash cow. page 4 / 8 switzerland ’ s prosperity is determined not by the way money is created