the potential for hedge fund leverage to adversely affect market dynamics. perhaps the recent widening of credit spreads will engender increased caution by managers of credit risk. moreover, as in 1999, cooperative private - sector efforts to identify and implement sound risk - management practices have the potential to reinforce the efforts of individual firms and their prudential supervisors. in this regard, a very encouraging development is the recent formation, by leading banks, securities firms, insurance companies, asset managers, and hedge funds, of a new group ( crmpg ii ) to assess improvements in risk management since 1999 and to update the crmpg recommendations to reflect subsequent changes in risk - management practices and in the financial, regulatory, and legal environment. ensuring sound credit - risk management by hedge funds'counterparties remains the most promising approach to addressing concerns about hedge fund leverage. some may believe that government regulation of hedge fund leverage would be more effective. but it would be very difficult to design a set of capital requirements for hedge funds that is appropriately sensitive to the diversity and flexibility of investment strategies that different funds employ and to the lack of diversification in the portfolios of individual funds. a regulatory capital regime that was not extraordinarily risk - sensitive would be ineffective at constraining hedge funds'risk - taking. at the same time, it would impair their capacity to pursue strategies that enhance the efficiency and liquidity of our financial markets and thereby to contribute to the productivity and resilience of our economy. conclusion the rapid proliferation of derivatives products inevitably means that some will not have been adequately tested by market stress. even with sound credit - risk management, a sudden widening of credit spreads could result in unanticipated losses to investors in some of the newer, more complex structured credit products, and those investors could include some leveraged hedge funds. risk management involves judgment as well as science, and the science is based on the past behavior of markets, which is not an infallible guide to the future. yet the history of the development of these products encourages confidence that many of the newer products will be successfully embraced by counterparty risk management policy group ( 1999 ). " improving counterparty risk management practices ( 348 kb pdf ), " report available through the house committee on financial services. the markets. to be sure, for that favorable record to be extended, both market participants and policymakers must be aware of the risk - management challenges associated with the use of derivatives to transfer risk, both

any economic sectors unscathed. and it is safe to say that these upheavals will force market participants to reprice many assets. does the term " stranded assets " mean anything to you? to hit the 2 degrees celsius target, we will need to curb the amount of carbon dioxide we emit worldwide. at a rough estimate, our co2 2 / 7 bis central bankers'speeches emissions are probably not much more than 1, 000 gigatonnes away from exhausting our budget. however, the co2 content of the known fossil fuel reserves still in the ground is far higher – something like three times as much. what this means is that much of these reserves will need to be left untapped. and the problem is that many businesses ’ valuations depend to a significant degree on the future anticipated value of such fossil fuel reserves. but if those reserves are out of bounds, as it were, they are effectively worthless, making them " stranded assets ". the loss in the value of these assets puts the companies ’ very survival on the line. as a case in point, the market capitalisation of the major us coal businesses has contracted by roughly 60 % over the past five years, and by around 90 % over the past ten. and that was against the backdrop of the us equity market as a whole racing from one record to the next. and that ’ s just one example of many i could mention. depending on how quickly and unexpectedly the transition and the resulting repricing process take place, they may well have a huge bearing on the stability of entire sectors of the economy. so it will mainly become an issue whenever businesses and investors are unable to plan for the long term because they need to be in a position to respond to short - term policy impulses. this poses the risk of cliff effects, which can trigger disruptions and financial losses that then affect the financial system and its stability. 3 climate risks in the german banking system let ’ s now jump straight from theory to practice. to what extent would german banks and savings banks be affected by a shift to a lower - emission economy? at first glance, the amounts lent by german institutions to sectors emitting especially high levels of co2 appear insignificant : loans of €1 million or more granted by german banks to coal mining companies currently amount to no more than just under €1 billion in total. however, loans to coal mining companies can make up 1 - 2 % of individual institutions ’ issued loans of