One explanation for this phenomenon is that the acquisition of insurance coincides largely with beliefs about economic developments. If expectations are very homogenous, this can lead to higher aggregate risk because of overly homogenous insurance schemes. On the one hand, the risks of a severe downturn may be underplayed and sow the seeds for unhedged losses. On the other hand, risks of recession may be overplayed, thereby leading to overly precautionary behaviour contributing to self-fulfilling outcomes. In either setting, when risk aversion is more homogenous, aggregate losses may be amplified. This box examines financial stability risks from disagreement in macroeconomic expectations, on the basis of a model using a disagreement metric for measuring and assessing financial stability. In the ongoing reform of the financial system, a key regulatory objective is to increase the soundness and resilience of banks. In line with this objective, regulators have placed emphasis on higher common equity capital requirements. The industry has been critical of a higher reliance on equity. Since equity is the most expensive source of capital, it is often asserted that higher equity ratios may materially increase banks’ funding costs, with adverse consequences for credit availability. Based on a sample of large international banks, this special feature provides an assessment of the relationship between banks’ equity capital, riskiness and required return on equity. Following a methodology employed in recent papers, an attempt is made to measure these relationships in the light of the hypothesis of Modigliani and Miller on the irrelevance of the capital structure for the value of the firm. The empirical evidence discussed in this special feature supports the notion that higher capital requirements tend to be associated with a decrease in the riskiness of equity returns and thus of the required risk premium, in line with the theoretical argument. This conclusion counters the industry’s concern about a material increase in funding costs and further supports the regulators’ focus on higher equity requirements. This special feature reviews trends in the credit quality of banks’ loan books over the past decade, measured by non-performing loans, based on an econometric analysis for a panel of 80 countries. The assessment of overall asset quality and credit risk in the financial sector is an important element of macro-prudential surveillance. A thorough understanding of the main drivers thus facilitates the identification of key vulnerabilities in the financial sector.Results suggest that – not surprisingly – real GDP growth has been the main driver of non-performing loans during the past decade. Exchange rate depreciations are also linked to an increase in non-performing loans in countries with a high degree of lending in foreign currencies to unhedged borrowers. In addition to these two factors, equity prices also have an impact on non-performing loans, in particular in countries with large stock markets relative to the size of the economy. Finally, interest rates also tend to affect loan quality. While these findings are found to be robust in the heterogeneous panel dataset, such results should only be applied with great caution to individual countries where additional country and sector-specific factors might have an impact on non-performing loans. Global liquidity, both in times of abundance and shortage, has a range of implications for financial stability. Surges in global liquidity may be associated with strong asset price increases, rapidly rising credit growth and – in extreme cases – excessive risk-taking among investors. Shortages of global liquidity may lead to disruptions in the functioning of financial markets and – in extreme cases – depressed investor risk appetite, leading to malfunctioning markets. This special feature takes a broad perspective and starts by defining and identifying the key drivers behind the multifaceted concept of global liquidity, all of which are related to more accommodative global financing conditions. Thereafter, a conceptual framework is proposed for how policy-makers can monitor global liquidity. This involves looking in depth at a broad set of indicators such as: (i) short-term interest rates in advanced and emerging economies; (ii) asset price valuation indicators; (iii) uncertainty, risk appetite and financial liquidity indicators; and (iv) capital flows, international reserves and cross-border credit growth. Building on this framework, the special feature also discusses policy responses to global liquidity developments from a financial stability viewpoint. The ongoing global financial crisis has demonstrated the importance of understanding the sources of systemic risk and vulnerabilities that may lead to systemic financial crises. An early identification of sources of vulnerabilities is essential as it makes it possible to take preventive, targeted policy actions. This special feature presents the Self-Organising Financial Stability Map (SOFSM), which is a novel methodology based upon data and dimensionality reduction for mapping the state of financial stability, visualising the sources of systemic risks and predicting systemic financial crises. This special feature outlines the evidence on the relationship between different bank characteristics and risk before and during the recent financial crisis. A significant amount of bank risk materialised during the crisis. It is argued that two major structural developments in the banking sector (namely deregulation and financial innovation) probably had a large effect on banks’ business models and capital levels. This, among other factors, affected banks’ incentives to take on new risks in the decade leading up to the crisis.