Derivatives being leveraged structures have the potential to amplify the loss or gain in an asset. For the same reason, it can also contribute to the volatility. 14. From a systemic financial stability perspective, the concern about the equity market stems from the source of financing equity positions.
It is matter of great concern if bank lending funds an equity market boom, or for that matter, any asset price boom. This is an unforgettable lesson from the crash of 1929, further underscored by the GFC. Recognising this, the banking regulations cap banks’ exposure to the equity markets. 15.