Banks need to develop a laser like focus on wrong-way risk, where the value of collateral held as security falls in the very situation where the counterparty defaults. And to consider if attempts to realise collateral might further add to negative price dynamics. Stress testing is also needed across sectors to understand how correlations in risk exposure can lead to correlated behaviours in stress. And stress tests need to account for institutional structures, governance and processes for liquidity management, to capture examples like the LDI event above, where DB schemes had assets available but were simply unable to get them to where they needed to be quickly enough. Bank supervisors can play a role in limiting the risks from leverage in the non-bank system to the core financial system through strengthening of risk management practices of dealer banks and prime brokers. My supervisory colleagues are indeed taking steps to ensure this. [13]  Let me turn finally to the steps financial stability authorities are taking. And where, unfortunately for the policy community, the challenges we face are complex, reflecting the large number and variety of institutions involved, and as the system of marketbased finance is global, meaning effective reform needs to be co-ordinated across jurisdictions. The FPC has put vulnerabilities in the non-bank financial system at the core of its work in recent years.
We also run surveys that provide information on exposures to hedge funds. But these provide only a partial view of portfolio leverage: either because they do not provide a link between borrowing and investment activities; or because we only see part of the portfolio due to non-banks’ multi-jurisdictional presence; or because the data are simply not sufficient to assess the risk of leverage. [19]  Given the global nature of non-bank business models, it is essential that transparency and data availability are enhanced through international efforts, and that authorities have the right metrics to assess the risks of leverage. [20] It is encouraging to see progress being made, for example by the SEC. [21] Beyond improving transparency, regulators will need to consider how best to ensure leverage is well managed. These could, for example, include broad market-wide measures such as market regulations to ensure excessive leverage is better controlled by market pricing and margins. Some international work is underway. The BCBS-CPMI-IOSCO margin group has published its final report on margin practices. [22] The report recommends policy work in six areas[23] – including increasing the transparency and predictability of margin calls, evaluating their responsiveness to stress, and enhancing liquidity preparedness by clearing members and non-banks. As part of the ‘next steps’, there is already work underway evaluating the responsiveness of cleared and uncleared margin models. Finally, there are important questions about the role of central bank balance sheets.