It cannot be excluded that competitive pressures may have forced some prime brokers to compromise on due diligence when dealing with hedge funds. Continuing vigilance therefore remains essential for banks to ensure that they retain a good grasp of their overall exposures to unregulated financial institutions.
In markets where backstop liquidity was judged not to be automatic, such as the ABCP currently involved in the Montreal Accord, noteholders could no longer redeem their paper. 2 In markets where backstop liquidity was robust, investors could exit and, as a result, ABCP came back on the balance sheets of financial institutions, which in turn raised concerns about the scale of their exposure.