. 13 for a “ multiple roles ” perspective of risk managers, see matthew hall, anette mikes, and yuval millo, “ how do risk managers become influential? a field study of toolmaking and expertise in two financial institutions, ” april 2012. also, see, ben w. heineman jr., the inside counsel revolution : resolving the partner - guardian tension, 2016, american bar association. 14 board of governors of the federal reserve system, division of supervision and regulation, “ sr 20 - 24 : interagency paper on sound practices to strengthen operational resilience, ” november 2020. also, see striving for operational resilience : the questions boards and senior management should ask, ” oliver wyman, 2019. 15 basel committee on banking supervision, “ revisions to the principles for the sound management of operational risk, ” march 2021. 16 nathan furr, andrew shipilov, didier rouillard, and antoine hemon - laurens, “ the 4 pillars of successful digital transformations, ” harvard business review, january 2022. 17 bank for international settlements, “ cyber - resilience : range of practices, ” december 2018. by continuing to use our site, you agree to our terms of use and privacy statement. you can learn more about how we use cookies by reviewing our privacy statement.

effects can be – seemingly small shocks can have large and systemic implications. economic fluctuations magnify and threaten the stability of the entire financial system. the channel of transmission can run through consumption or investment. • high levels of household debt affect output stability through the adjustment of consumption. evidence for the us shows that households with high levels of real estate debt cut back consumption in response to shocks to asset prices, thus amplifying the cycle. • firms with high levels of debt cannot smooth investment when an adverse shock hits. • high levels of public sector debt can be destabilising. as well government spending cannot cushion the effects of financial crises when public debt levels are already too high. these effects are further magnified if households, firms, and governments have borrowed from a banking sector which is insufficiently capitalised. adverse shocks then set into motion a downward spirals of asset valuations and prices that ultimately threaten the solvency of financial institutions. the destabilising effects of debt arise from its contractual features. standard debt contracts are insensitive to the borrower ’ s situation. after risks have materialised an adjustment to shocks can occur only through new lending or through haircuts on existing loans. in contrast, the value of equity adjusts if the situation of the borrower changes so that equity provides a risk sharing mechanism. in other words, equity as a claim on real assets has stabilising features compared to debt as a claim on nominal assets. the stabilising features of equity contracts have also been visible during the european debt crisis. in europe, debt finance has been more prone to capital flight than equity finance. furthermore, diversified cross - border equity holdings help detach consumption from business cycle fluctuations. cross - border equity allows more effective cross - border risk sharing and consumption smoothing. increased reliance on equity finance would be particularly beneficial in the european monetary union, where exchange rates cannot adjust to cope with regional macroeconomic shocks. 3. what are the policy implications? financial systems which rely more on equity rather than debt finance can be conducive to growth, and they tend to be more resilient to shocks. this suggests that there might indeed be a “ double dividend ” – financial sector reforms that contribute to financial stability also promote growth. viewed in this light, there are a couple of takeaways for policymakers and regulators. the first is that a more developed financial system is the basis for economic growth. however, our reform efforts should not be aimed at