Banks were stronger. In the UK they were three times better capitalized than at end 2008. And to be clear –very significant government support and central bank interventions were required. I’ll come back to this later. But there is one other reason for the missing panic that I want to focus in on. After the 2008 global financial crisis, the G20 put in place reforms designed to make the global financial system simpler - to untangle the spaghetti bowl of bilateral derivatives trades that had fed the 2008 panic.2 They incentivised - and for many products mandated - central clearing of derivative trades. Global clearing has as a result, grown significantly in the past decade. Today, about 60% of credit default swaps are cleared, as well as 80% of interest rate contracts, up from about 10% and 40% respectively in 2008.3  This brought greater stability to derivative markets by ensuring that if a major financial institution were to collapse, you needn’t worry about a domino effect – with the failing firm’s derivatives contracts potentially threatening the viability of any number of other firms.4 1  Ben Bernanke, Op-Ed at Brookings Institution, 13 September 2018 G20 Leaders’ Statement Pittsburgh Summit, September 2009. 3 Bank of International Settlements Statistical Release, November 2020 4 Although it’s not my focus today, reforms to bilateral derivatives trading have also helped to reduce the chance that bilateral contracts fuel a panic.
2  2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  One of the key ways central clearing counterparties – CCPs – help prevent panic is to be sure that as markets move, firms quickly pay for changes to their derivatives contracts, and insure against likely further changes. First, when derivatives contracts change value, the holders of those contracts exchange money right away. Losses and gains are promptly allocated to the firms on either side of the trade. This limits the chance that, if one side of the trade defaults, the other firm is left holding the bag for the defaulter’s bad trades. This is called variation margin. Second, CCPs require firms to place pre-paid self-insurance with the CCP to cover the predicted liquidation costs in the event of their default. Because derivatives markets can be fast moving, a key factor in how large this self-insurance needs to be is how volatile the markets are. This is known as initial margin. Importantly in times of market turbulence, both losses and gains of individual participants and required pre-paid self-insurance will rise. They are inherently pro-cyclical. As Deputy Governor Jon Cunliffe said last summer, this is a feature, not a bug.5  So did the simpler, post 2008- system work? In March and April 2020, we saw some of the biggest two-day price moves for some cleared products in the past decade. In a number of products the price moves were much larger than ever seen before.