For example, with interest rates at very low levels for a long period of time, and in an environment of low volatility, investors, banks, and other market participants may become complacent about interest rate risk.1 Similarly, in such an environment, investors holding assets which entail exposure to greater credit risk may not fully appreciate, or demand proper compensation for, potential losses.
Finally, investors may seek to boost returns by employing additional leverage, which can amplify interest rate and credit risk as well as make exposures less transparent. One of the lessons of the financial crisis was that the potential adverse effects of a rapid unwinding of financial imbalances, regardless of the causes, are significantly increased if market participants employ significant leverage.