But as we know, in the crisis, a sizeable proportion of these assets turned out to be complex, opaque and exposed to tail risk – so under stress, these markets broke down catastrophically and have yet to fully recover. This has prompted the regulatory authorities to develop new criteria around securitisation that, among other things, may bolster their liquidity in the future. 2. ETFs are another form of financial engineering that have grown rapidly over the past decade or so – from a small base in the early 2000s to more than $ trillion today. Equity funds still comprise the majority of ETFs. But the share of fixed income ETFs, in which the underlying assets are much less liquid, has grown substantially – in Europe, from around 5% in the early 2000s to around 25% today. ETFs are exchange traded, they offer investors liquidity. Prices of ETFs are usually kept in line with the assets they track by market participants being willing and able to transact in the shares they issue and the underlying securities. But in times of stress not only can their liquidity characteristics revert back to that of their underlying assets, they can also trade at a discount to the value of these assets. We saw some of this effect in the market turmoil last summer. We need to understand better why these effects happened and the circumstances in which they could reoccur. 3. And market making itself is another example.
It is to illustrate how far we are into the implementation phase of that reform programme, what remains to be done and, from the vantage point of a macroprudential regulator, how I view the future now that we are eight years on from the financial crisis and memories are beginning to fade. On the first point, the implementation phase, it is illuminating in itself that from a macroprudential point of view I have also chosen to talk about something else today. That is not to say that there is nothing that remains to be done. There is a vast amount of complex and difficult implementation that still needs to happen. My colleague, Andrew Bailey, will set out in a speech tonight the progress we’ve made so far on prudential regulation and three big areas of implementation left to complete: the Senior Managers Regimes, structural reform and competition. But as I have said before, the contours of the reformed regulatory framework for banks are clear – the Basel 3 capital and liquidity regime for banks, the reforms that address too big to fail, especially the regime for loss absorbing capacity in resolution that needs to be held by global systemic banks – which goes by the unlovely acronyms of TLAC and MREL and which is on course to be agreed by the G20 in Antalya this November. And the changes to derivatives and securities financing designed to increase transparency and reduce risk. There are, it is true, some material components of the reforms still under construction.