NBFI has exhibited recently several vulnerabilities related to liquidity risk, such as liquidity mismatch issues in open-ended funds, or the excessive use of leverage, leading to liquidity strains notably in the event of unanticipated spikes in margin calls in times of stress. This is the common pattern of the three financial instability episodes we have experienced recently: the dash for cash of MMF in March 2020, the commodity market this year, and also pensions funds use of derivatives in the UK, resulting in fire sales of gilts. It is high time that we moved forward to enhance the regulatory framework for NBFI that will ensure better liquidity management on financial markets. Currently, the design, calibration and use of existing tools is the responsibility of market participants whose incentives are not always aligned with financial stability goals. Tackling systemic risks in NBFI may therefore require the  development of additional rules both for leverage and for liquidity management in case of systemic risk developments. Stricter requirements as well as a macroprudential approach would contribute to prevent ex ante moral hazard, and thus avoid ex post central bank interventions. Second, interest rates are going up at a time when the level of public and private debt are at historic highs in many countries – 97% of GDP at end 2020 vs 79%  Page 6 sur 11 of GDP in the aftermath of the GFC. In particular, nominal debt levels have increased by a total of almost $ trillion for all FSBii member jurisdictions in the post-GFC period.
Consider the earlier example of a disaster-myopic writer of deep out-of-the-money put options on UK equities, priced using distributions drawn from the Golden Decade. Let’s say that, in June 2007, a fiveyear put had been written on the FTSE-100 with a strike price 40% below the prevailing market price. Today, that put would be at-the-money. Hedging that position would crystallise a loss roughly 60 times the income received from having written the option in the first place. 10 This example is far from hypothetical. These are essentially the same trades undertaken by a number of insurance companies and other investors ahead of crisis. In the go-go years, the insurance premia from them yielded a steady income stream. But when risk shifted, many insurers have suffered large-scale losses as premia have adjusted and investors have scrambled to hedge. The large US insurer AIG has so far suffered gross losses totalling over  10  Roughly half of that loss represents under-estimation of the distribution of returns back in 2007. BIS Review 18/2009  7  $ on CDS contracts alone. Losses by the monoline insurers have also totalled in excess of $ Second, the breakdown of these models had the consequence of turning risk into uncertainty, in the Knightian sense. 11 Once the models broke down, how were assets to be priced? Practitioners have a devil of a job pricing assets in the face of such uncertainty. So too do academics, though some attempts have been made.