It also, as I have noted, amplifies market corrections as leveraged investors are forced to sell when credit dries up. I do not start from the view that leverage poses the same scale or nature of risks in the market-based finance world as it does in banking. But nor am I confident at present that it is without systemic risk. We do not have the tools to make that assessment yet. We need a better set of lenses through which to view leverage in this world in order to assess the risks that it might pose to the system as a whole – hence the work now underway in IOSCO and elsewhere. The use of financial leverage i.e. borrowing to gear up exposure to risk looks to be materially lower in market-based finance than in the banking world. 14  Bank of England (2014) Baranova et. al. (2017) 16 Recommendations for Liquidity Risk Management for Collective Investment Schemes, February 2018 17 As reported in Bank of England Financial Stability Report, November 2017. The in-depth assessment will seek to develop the FPC’s understanding of how non-banks use leverage, and what financial stability benefits and risks arise from leverage. It will examine measures of leverage and its distribution throughout the non-bank financial system. 15  7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Retail investment funds in most jurisdictions are heavily constrained by regulation on the amount of borrowing they can do. In the UK, insurance companies are limited users of financial leverage.
12  All speeches are available online at www.bankofengland.co.uk/speeches  12  Chart 1: Growth of market-based finance  Chart 2: Growth in open-ended fund assets worldwide and flows  USD trillion 200 180  Total net assets Flow Residual (valuation)  $ trillions 22 20 18 16 14 12 10 8 6 4 2 0  160 140 120 100 80  60 40 20  Equity  Bond  2008 2009 2010 2011 2012 2013 2014 2015 US  Euro-Area  China  UK  1.00 Q4 2008  Others  Q2 17  Q4 2008  9.00  Q2 17  Source: FSB Global Shadow Banking Monitoring Report 2016 dataset Notes: Data are for 21 participating jurisdictions and the Euro Area, Data include insurance corporations, pension funds, other financial intermediaries and financial auxiliaries. Source: Bank of England Financial Stability Report, Nov-17 Notes: Adjusted for a break in the series due to expanded coverage in 2014 Q4 on best-endeavours basis. Including money market funds but excluding funds of funds where possible. In 2008 Q4, bond and equity funds accounted for half of all openended funds; in 2017 Q2 it was two thirds. Chart 3: Impact of a 10 basis point increase in yields on sell volume  Chart 4: Gross capital inflows to advanced economies by instrument  % change in sell volume  Procyclical  Rest of sample Taper tantrum  Countercyclical Dealer banks  Non-dealer Insurance banks and Companies sec.