The sectors trade with each other, and with the banking system, behaving in ways that we calibrate to known features of the system. That means behaviour in one part of the system affects decisions elsewhere. The system is more than the sum of its parts. The simulator, by its nature, does not capture the full diversity of the assets and participants in the system. It is a simplified version of reality, helping to guide us. Using it, we can begin to assess what different features of the system might matter for the resilience of corporate credit supply. In general, it highlights how financial institutions do not need to be at risk of failure for credit supply conditions to be fragile. I’ll highlight two features that stand out in the simulator, both centred on liquidity: cashflow pressures on leveraged investors like hedge funds, and redemption pressures on open-ended funds. Cashflow pressures on leveraged investors  Investment funds have grown in importance as holders of corporate debt in general, and they now hold around 25% of the global leveraged loan market – a quarter of which is in the form of CLOs, often the most risky slices. The relevant funds are not the super-financially-leveraged, dangerous institutions of some imaginations. 11 Even hedge funds take positions worth only about one and a half times net asset value – materially less than they did a decade ago.12 And financial leverage in funds other than hedge funds is generally limited.
Co-operation between regulators across jurisdictions is vital in containing potential systemic risks that have extended beyond the national and regional boundaries. In the case of Islamic finance, a rigorous and well developed legal, regulatory and Shariah framework is being put in place. Such a regulatory framework also needs to govern market practices by the Islamic financial institutions. This will involve the implementation of the prudential standards that have been issued by the Islamic Financial Services Board, the IFSB. The IFSB also has an important role in the harmonisation of prudential standards, in addition to contributing towards the consistent development of Islamic finance across different jurisdictions. Several parts of the world, including Malaysia , have implemented the prudential standards issued by the IFSB. These prudential standards which have been designed to take into account the unique features specific to Islamic finance will contribute towards ensuring its soundness and stability. British financial regulators are therefore encouraged to be members of the IFSB. Early this year, the IFSB in collaboration with the Islamic Development Bank (IDB) established a task force on Islamic Finance and Global Financial Stability. The task force is responsible to examine the resilience of Islamic finance in the current challenging global financial environment and to examine further the building blocks that need to be put in place to develop the international financial architecture to strengthen further the resilience of Islamic finance.