The evidence suggests that investors in funds which offer short notice redemptions and that invest in less liquid assets tend to redeem more in response to a downturn in the funds’ performance than those in more liquid funds. And the redemption behaviour of investors in bond funds seems to have become more sensitive as these markets have become less liquid. 19, 20  Drawing these developments together, it’s possible that just as corporate bond markets have become less liquid, they may have become susceptible to greater selling pressure after a shock. We may have more of a mismatch of liquidity. That could amplify any price adjustment. None of this is conclusive and serious problems have not been caused by this in the past. But we have a duty to take the possibility seriously – to ask ‘could it happen?’ With markets having evolved so much in the past decade, the absence of problems in the past is no guarantee for the future. That’s why we’ve been developing simulations of the impact of this liquidity mismatch. The asset management industry has been a constructive partner in this work. I hope we and this Centre can collaborate as we take this work forward. There is much more to do, but our initial work suggests a case for exploring further, including by incorporating a range of other investors into the simulations and assessing the impact not just on bond markets but on the wider economy. You can expect to hear more from us as these efforts develop.
(2015), suggest that the average cost of a financial crisis has been 73% of GDP, which translates to a cost of roughly £ 20,000 per capita if a financial crisis had taken place in 2016. 2 For example, Bunn and Rostom (2015) find that, during the financial crisis, highly indebted UK households, with loans four times larger than their income, reduced their consumption relative to income around three times more than UK households with loans between one or two times their income. 2  All speeches are available online at www.bankofengland.co.uk/speeches  2  So today I want to consider one of these next frontiers for macroprudential policy: market-based finance of companies. The nature of corporate finance has shifted decisively in the past decade. Since the crisis, nearly all net finance raised by private companies in the United Kingdom has been through the issuance of equity and bonds. Market-based finance has been the spare tyre to what was, after the crisis, a punctured banking system, unable to lend. The scale of businesses borrowing through issuing bonds is now on a par with their borrowing from UK banks. The shift in the balance of corporate finance should be a positive for stability. A more diverse system can be a safer system. The challenge for macroprudential policy is to ensure this source of finance develops sustainably and safely, so that its users can have confidence in the service they get from it, and the wider economy need not fear it. That challenge is not a distant one.