haircuts on lending against those securities increased ( chart 5 ). both the risk - averse moneyseeking investors and the leveraged risk - seeking investors on either side of the dealers ’ balance sheets questioned the liquidity and solvency of many of those dealers. maturities shortened dramatically until most transactions were at overnight maturities, rolling daily ( gorton et al, 2014 ). some dealers experienced “ runs ”. financing terms for leveraged investors tightened sharply, causing some to fire sale assets and adding to market instability. in the us, the market infrastructure was flawed, with the daily unwind of tri - party repo transactions relying on massive intra - day financing from private sector clearing banks. 8. 5 % is the sum of the 6 % minimum tier 1 to risk - weighted assets ratio plus the 2. 5 % capital conservation buffer under basel iii. bis central bankers ’ speeches since the crisis, regulators have addressed many of the underlying problems of excessive leverage and maturity transformation : a. securities financing transactions are included in the internationally - agreed leverage exposure measure adopted by the basel committee 4. leverage ratio requirements will put prudent limits on the size of dealers ’ matched books. b. they are also included in the basel committee ’ s measures to address liquidity risks. the recently - announced net stable funding ratio 5 will require short - term secured loans to financial and non - financial borrowers to be backed by at least 10 % stable funding. and supervisors can use the liquidity coverage ratio 6, as we have been doing for some time in the uk, to require dealers to hold liquid assets against prime brokerage risks such as withdrawal of cash margin by hedge fund clients. c. the financial stability board has agreed minimum haircuts 7 in order to limit the leverage that non - banks can obtain through borrowing cash against private sector securities. these haircut floors have deliberately been set at “ backstop ” levels designed to prevent excess in times of market exuberance while allowing room for prudent firms to do their own risk management. d. the us authorities have taken steps to strengthen the tri - party infrastructure. the reforms are not yet complete. one important missing ingredient is data collection to monitor market trends more closely. for example, the authorities need to understand the composition of the collateral being used across key financial markets in order to identify concentrations. the financial crisis showed the risks associated with a market - wide margin call when widely - used collateral is subject to an unexpected common price shock

. data is also needed to track the terms of transactions, including maturity and haircuts. one interesting idea is for regulators to run exercises in which they ask prime brokers to calculate portfolio haircuts against archetypal leveraged portfolios. the aims would be both to track any loosening in market - wide standards over time and to spot outlier dealers that require lower haircuts than their competitors. these significant regulatory reforms will have consequences for the behaviour of dealers and investors in securities financing markets. some market participants may seek ways around the new regulations : for example, there has been talking about dealers “ renting ” balance sheet from other market participants or establishing off - balance sheet financing vehicles. the flipsides of more resilient dealers and markets in periods of stress may well be less leverage, less maturity transformation and lower dealer inventories in more normal periods. the balance is not easy to strike ; we may need to readjust our approach as we learn. but the goal of these reforms is clear : to make securities financing markets resilient. robust securities financing markets should help to stabilise rather than destabilise the financial system in the face of shocks. the reduction in dealer inventories has attracted a lot of comment, with questions about whether they will be willing and able to provide liquidity as market makers in falling markets on the same scale as in the past. but the role of dealers in providing stable financing to leveraged investors may be equally important. those investors may be the most likely to see a market crash as a buying opportunity – but only if they are not over - leveraged and have access to borrowing from financially - sound dealers. put another http : / / www. bis. org / publ / bcbs270. pdf. http : / / www. bis. org / bcbs / publ / d295. pdf. http : / / www. bis. org / publ / bcbs238. pdf. in october 2014, the fsb published strengthening oversight and regulation of shadow banking : regulatory framework for haircuts on non - centrally cleared securities financing transactions ( http : / / www. financialstability board. org / publications / r _ 141013a. pdf ). bis central bankers ’ speeches way, we want dealers and leveraged investors to be providers not demanders of liquidity in a crisis. references gorton, g b, metrick, a, & xie,