system resilience : macroprudential instruments ” at the barclays annual lecture in london. tucker p m w ( 2010 ), “ shadow banking, financing markets and financial stability ”, speech at a bcg partners seminar. bis central bankers ’ speeches what that amounts to in practice is recognising that the degree of resilience of market liquidity matters a lot. i have been arguing that a market ’ s liquidity is unlikely to be resilient if demand is dominantly from leveraged investors and traders. they buy when prices are rising, but stop buying or even sell when the price stops going up, leaving prices without a firm underpinning – and often with prices perched on a precipice. that element of recent events is missing from shleifer ’ s set up, but in the real world it is precisely what we might expect if one joins up his story about innovation induced by myopia with hyun shin ’ s earlier paper7 about the association of leverage and asset - prices fluctuations. if securities are fundamentally mispriced because of blindness to a type of risk and, further, are held dominantly by leveraged players, the adjustment when it comes will be all the greater. in commentary on other papers, shleifer himself has argued against one of the fundamental drivers of the crisis being the liquidity exposures stemming from abs and other securities being financed by short - term repos ; what gary gorton and others have called the run on repo. 8 but the spirit – if not the analytics – of his paper could extend to myopia about liquidity risk ; it was neglected because agents forgot about it. only recently the leader of a financial institution that emerged relatively unscathed from the crisis told me that they had been blind to the possibility of a really severe liquidity crunch ; and that they had reacted by massively cutting their short - term funding in the worst days of the crisis. as a policymaker, for whom explanations can be complementary rather than seminar papers in competition, the myopia and run - on - repo se stories seem to me to join up rather well. what to do? as the basel supervisors committee proceeds with the frtb, i can imagine reluctance to opine on the liquidity of markets, but it was not beyond the wit of the official sector to observe that crucial parts of the abs market were utterly dependent on levered money and so very unlikely to be liquid when

to see the risks they have neglected. investors can then react in a dramatic way. they stop buying, sell ; prices collapse etc. but an exogenous shock is not needed to generate that unravelling. if the overpriced securities have led to credit conditions being too loose, then somebody – households, firms, sovereigns, or everyone – will have accumulated too much debt, and so eventually fundamentals assert themselves : defaults rise, and realisation sets in. as a younger colleague said to me, “ the model ’ s key features are all way outside what i was taught in the ‘ 90s ”. but doesn ’ t it sound ever so slightly like the real world? for me, one of the strengths of shleifer ’ s paper is that he cites good examples, not only from the recent crisis but earlier ones too. a key past case is the boom in issuance of collateralised mortgage obligations ( cmos ) in the run up to the 1994 mini - crisis, an episode that i tried – too timidly – to highlight in 2006. 3 of many examples from the run up to the recent bust, a great one is the late - cycle cpdos – constant proportion debt obligations – which were rated aaa, paid around 200bp over money market rates, and had a big exposure to tail risk. 4 and on the great awakening, shleifer himself gives the example of a realisation about abcp, abs and so on in mid - 2007 after subprime delinquencies had risen and faith – note, faith – in rating agency ratings of structured finance securities had evaporated. this exactly chimes with the market intelligence that the bank was picking up in august 2007. i well remember stuart gulliver, now ceo of hsbc, saying to me very early on something to the effect of “ anything with “ abs ” or “ securitisation ” in the label is now toxic ”. indeed, shleifer ’ s story, and the broader one told by adair this evening, fits with the thrust of the bank of england ’ s strategy towards market intelligence, framed in around 2002 / 03. this amounted to saying that we needed to think about markets somewhat differently when we are doing monetary policy and financial stability. for monetary policy, in most circumstances a reasonable default assumption is that core markets are more or less efficient most of the time. so, while we absolutely have to be alert to distortions, we