That is because more than $ trillion of assets are held in funds that promise daily liquidity to investors despite investing in potentially illiquid underlying assets.32 In other words, they are built on the lie that markets always clear. To assess the risks of fire sales and contagion across emerging and credit markets, authorities need to gather and share data on asset management. In this context, the FSB expects that consistent and decisionuseful measures of leverage will be developed to support an effective global risk assessment. I would encourage industry to engage with the upcoming IOSCO consultation on this issue. The FSB is also refining its Systemic Stress Initiative to explore how funds and other non-bank financial institutions might collectively act in ways that amplify shocks.33  30  IMF Article IV Consultation for the People’s Republic of China (2018). See Boston Consulting Group estimate of global AUM in Global Asset Management 2018. 32 See FSB Global Shadow Banking Monitoring Report (2017). 33 The Bank of England is working to better understand such dynamics as well. See Baranova, Y., Coen, J., Lowe, P., Noss, J., and Silvestri, L. “Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds”, Bank of England Financial Stability Paper, (2017).
Do they interact in a way that dampens a shock or in a way that intensifies it? To the extent that the system has  BIS Review 83/2009  1  important reinforcing rather than dampening mechanisms, then it may need to be modified. That may require significant re-engineering. Let me give you some examples of reinforcing and dampening mechanisms: Capital. When firms have incentives to continue to pay dividends to show they are strong that is a reinforcing or amplifying mechanism. The paying of the dividends depletes capital, making the firms weaker. In contrast, when firms have incentives (or are forced) to cut dividends quickly to conserve capital, that is a dampening mechanism. Foreign exchange. When the debts of a country held by foreigners are denominated predominantly in the home currency, currency depreciation reduces the net debt burden – the value of foreign assets climbs relative to the asset claims of foreigners. The U.S. operates in a dampening regime in this respect. In contrast, when the debts of the home country are denominated in foreign currency, currency depreciation increases the net debt burden. Some of the Baltic countries are wrestling with this dilemma currently. Some reinforcing mechanisms that we might want to engineer out of the financial system: •  Collateral tied to credit ratings. Credit downgrades lead to increased collateral calls which drains liquidity, leads to forced asset sales, further weakening the firm subject to the collateral calls.