 Hello, we are back and we will move to our last panel on evolution of liquidity risk in an environment of higher interest rates. Again, let me remind you the audience that you can ask questions at the end of the discussion via Webex or Mentimeter and you will see the code in the slide. So now let me introduce the chair of this panel, Fabio Natalucci, who is Deputy Director of the Monetary and Capital Markets Department at the International Monetary Fund. Mr. Natalucci will introduce the panel. So please go ahead, Mr. Natalucci. Thank you very much and also thank you for the invitation. It's a pleasure to be here and moderate this panel. Let me briefly introduce the panelists. We'll dispense from going through the long resumes and then jump right into the discussion. So we have Viral Charia is a professor of economics in the Department of Finance at New York University's Southern School of Business. Also working in the policy world as Deputy Governor of the Reserve Bank of India as well as academic advisor to a number of Federal Reserve in the Federal Reserve system. Then we have Professor Bruno Bayes who is a professor of finance at HEC in Paris working on finance, contract theories, parliamentary economics, political economy, blockchain, monetary economics, fellow of the econometric society and also a member of the advisory scientific committee of the ESRB. Professor Loriana Pelitzon, she's the head of financial market department, coordinator of gender equality at the Leibniz Institute for Financial Research. She's a full professor at Gede University in Frankfurt, the chair of law and finance and also professor of economics at Kaposka University of Venice. And then last but not least is Dave Ramstein, deputy governor for markets and banking at the Bank of England responsible for oversight of markets, banking, payments, innovation, resolution directorate and he's a member of the Monetary Policy Committee, Financial Policy Committee and the Prudential Regulatory Committee. So to get started maybe I'm just maybe some food for thought as we move to the presentation and discussion. Maybe I want to highlight four points to think about. One is the, as we move in an environment higher interest rate, not just higher but higher for longer, despite what markets have been pricing the last few days. One issue obviously is the hope you've learned from the ESRB episode in March here in the US, which is the feedback between liquidity and solvency. Here at the Fund we are trying to bring this feedback into the way we do stress testing, for example, in the Global Financialability Report that we published in October. The second point is that this is not just a banking issue, this issue in terms of liquidity risk in the higher interest rate environment. It's also an issue that affects non-bank financial intermediaries like the NDFIs. And so we have seen some of this dynamic, we have seen the LDI episode in the UK, also lots of focus on money market funds here in the US at the time in which there were outflows, for example, from the banking sector. The third point is like what have we learned in terms of policy, both in terms of US and UK experience, for example, in terms of communication. What are the challenges when you're trying to do tight and monetary policy but then you need to step in as a lender of last resort. That raises a number of operational communication challenges. How to think about MBFI access to the central banks, balance sheet in terms of market operations, sending liquidity, lender of last resort. And then finally, we have seen a lot of generation in interest rates. If you look just at the US rates, the tenure went from three and a half at the end of May to 5% few weeks ago now back to four and a half. So it's not just the level of rates and matter, but the speed and also the volatility generated by that. And now to think of that in terms of management of liquidity. So with that in mind, we move to the first presentation by Viral, the floor is yours. Sorry, I'm just waiting for the slides to come up. I don't see them yet. Okay, very good. Thank you Fabio for the kind introduction. Good morning, good afternoon everyone. So I wanted to talk a little bit in the context of the recent episode of banking stress. Why now? And maybe what it means for liquidity risk going forward given that interest rates are going to be higher. Okay, move to the next slide. My remarks are partly based on the book we wrote around the banking stress in the middle of this year with a number of colleagues at NYU and also some non NYU friends. Steve Chaketty is I think in the panel I see he's contributed to our volume as well. So I welcome you to take a look at it for a full view. And on the next slide, I also refer to some of my academic work, notably with Rahul Chauhan, Raghuram Rajan and Sasha Stefan on why are we seeing that when central banks expand and contract their balance sheet. We are ending up with liquidity stress and that's going to be the thrust of my remarks today. We've called it liquidity dependence that the central banks are never able to get out of the expanded size of their balance sheets. Because when they expand, they are putting in motion a chain of reactions in the commercial bank balance sheets size, which makes them further dependent on the central bank. Before they've exited the expanded size policy, they have to expand all over again and there's a ratcheting up that's rising. What I will probably not get much time to talk on is what all this means for deposit insurance. How might one handle the solvency and liquidity interactions through modified stress test, etc. And I understand Runo who will follow me is going to talk a lot about solvency issues, so I'll leave that to him. So if we move to the next slide, so this is the picture that everyone's talking quite a lot about. I've actually borrowed it from one of Steve Chakit's class presentations at Brown. So Steve put together this slide in which you see that Silicon Valley banks deposits which were mostly uninsured because they're more than 90% in deposits had an extraordinary boom bust pattern. In fact, I've been thinking about this phrase of like deposit waves or deposit boom and bust patterns. We normally think about leverage as a concept, but I want to think about uninsured deposit or wholesale finance boom and bust patterns and maybe we need to pay a little bit of more attention to this aspect rather than just leverage boom and bust. In any case, coming back to Silicon Valley Bank, what you see here is that until first quarter of 20, the deposits are growing at maybe about $2-2.5 billion per quarter given its size roughly in line with perhaps what the GDP growth is, etc. And then something spectacular or extraordinary happens, which is that it starts growing its deposit base at more than $10 billion per quarter and for three quarters in fact exceeding $20 billion per quarter. And then once the rates start rising in second quarter of 2022, first there is a slow bleed, which is actually an active policy of the bank, maybe not entirely active but partly due to tech sector withdrawals. But partly because banks don't like to pay sleepy depositors like me any decent interest rate until one day I wake up and whack them by pulling out my deposit and which I did myself, but many other depositors did as well. Now in case of Silicon Valley Bank, this backing of the deposit franchise happened rather violently so to speak because a large number of them, they drew their deposits together in March of 2022 and there you see that big collapse. But what I want you to focus on is the fact that it's not, I completely don't believe that this is a sunspot or like a random panic that has happened from somewhere. Just look at the spectacular growth of deposits before and in case of Silicon Valley Bank, it is an inshore deposit. So there may be some panic aspect to the last day of people running because of social media interactions, etc. But there's no way that this sort of wave of deposit boom, it's certainly highly vulnerable to stress. If we go to the next slide then, the key point I want to drive home is that we should not write off Silicon Valley Bank's problems as one off. Because what happened to Silicon Valley Bank happened to the banking sector in the aggregate. So if you look at the US commercial bank balance sheets, these are now their uninsured deposit bars and the blue line is the share of uninsured deposits in the total deposits of the US commercial banks. What you see is that the share rose during the pandemic from about maybe around 48% to 53%. So that's a 5% increase in the share over a two year period. That's pretty large in total quantity. That's about in the range of 3 to 3.5 actually slightly over 3.5 trillion. And you can see that pre-pandemic, in fact, there wasn't even a robust pattern of growth. Uninsured deposits were probably hovering maybe slightly around 100 billion or $200 billion growth max per quarter. Then the pace increased a little bit after the repo market spike and Fed increasing its purchases of T-bills. And then comes the pandemic and the fiscal stimulus. And you see a massive wave of increase now growing at more than $300 billion per quarter for about eight quarters and in one quarter at close to $900 billion, which is the March 20 quarter. And then the same way what happened for Silicon Valley Bank, which was a mixture of tech sector withdrawals and loss of deposits due to not paying sleepy depositors high rates, happened also for the banking sector as a whole. Banking sector as a whole also started losing deposits in second quarter of 2022. And then, of course, there was a range of banks on which the deposit outflows accelerated once Silicon Valley signature and first Republic and Silvergate started getting into stocks. So first thing, so if we go to the next slide, that is the main message I want to convey based on the research that we have looked at. You actually see it in a longer stretch of data that whenever the central bank expands its balance sheet, which is in the gray line that those are the quantitative easing operations. Then if you look at the top lines, the thick black line is the uninsured deposits of banks, they grow as well. Typically, if the central bank withdraws without accelerating interest rates very fast, it seems these deposits don't lose the don't leave the banking system. So you see in the post QE and QT phase, the uninsured deposits are relatively stable. They're still not shrinking. So in that sense, you could say it's still a source of vulnerability left there. Of course, then the pandemic is like the mother of monetary and fiscal stimulus in the United States. And so the deposits are ratcheting up very, very fast. And if you look closely at the dashed line at the top, which is the insured demandable deposits and the thick black line, which is the uninsured demandable deposit. As the QE keeps ramping up the reserves in the gray line, it is the uninsured bank deposits which keep growing up. Whereas fiscal stimulus, which contributed relatively more to the insured deposits, they are gradually being used for consumption or investments in equities and so on. And in the final phase of QT of the pandemic, because the rate hike is so fast, maybe perhaps also because there's the overnight repo facility with money market funds that's causing now a faster bleeding of the deposits out of the banking system. We go to the next slide. So to me, this is an important observation, which is that central banks perhaps rightly think that they have an important tool, which is how to expand and contract that balance sheet as a way of pumping reserves into the economy. And there's a view that oh, we are supplying liquidity to the economy. But this view is in our assessment rather incomplete, because the reserves go on to the balance sheet of the banks. The securities which are tendered are not always from the banks. They are often from the non banks such as insurance companies, pension funds, hedge funds, family offices, high net worth individuals, mutual funds, etc. And so the injection of reserves on to commercial bank balance sheets also causes an expansion of their deposit base. So it's not just the central bank that's expanding. It's also private money that's expanding in the economy in the form of these runnable liabilities on the right hand side of the bank balance sheet. To go to the next slide, we can skip this. This just explains the mechanics of the QE, but I think that's probably well known to this audience. And so I want to show you this ratcheting up of liquidity risks, which then helps understand why now. So if you look at the base of uninsured demandable deposits to assets in the US financial system and across these three categories of banks. So more than 250 billion plus are the full LCR eligible banks. 50 to 250 billion dollar size of banks have a slightly moderate version of the liquidity coverage ratio. And below 50 billion, there is no application of the leverage ratio. And what you see is that there's a general ramping up of this stock of uninsured demandable deposits. And in terms of the relationship to assets, it's actually the sharpest for the smallest banks where the liquidity coverage ratio is not applicable. So there's a view that liquidity coverage ratio does not treat the banks which are not treated. But that's not true. The control sample is also treated because uninsured deposits are now expensive for the largest banks. So they are relatively speaking more attractive for the smaller banks. So everything is treated here in the competition for the deposit market. But that explains the dispersion. The levels are going up across board. And that is because of the overall increase in the size of the central bank balance sheet, the waxing of the balance sheet. And then you can see that the waning at the end is associated with these outflows. If you go to the next slide, there's a slightly more refined version of liquidity risk you could create, which is to say, oh, it's not just uninsured deposits. Maybe there are other demandable claims like credit lines. And why should it be assets? Maybe we should look at the liquid assets, which is the reserves and fed eligible collateral that each bank has. And when you do this, you actually see an even sharper dispersion, which is that the small banks below 50 billion have really ramped up their liquidity and brought it to the same level as the large banks. The large banks in terms of illiquid claims relative to liquid assets have actually stabilized. They had huge wholesale deposits at the time of global financial crisis, but those have now come down substantially. And what this picture makes it very clear is that we should now get a sense of where the stresses are likely to materialize. What the shock is, it could be something small like the repo market stress of 19. It could be a giant shock like COVID again outside banks or it could be something which is related to the balance sheet of banks because interest rates have risen and some banks have gone rogue and invested a lot in long-term assets which have gone out. So if you go to the next slide, I'll conclude with that, which is that in my view, central banks and policymakers need to embrace that this new tool of monetary policy, which is the central bank balance sheet size, has financial stability consequences. Because it expands the stock of runnable private money on the balance sheets of the commercial banks. So my question is, does this mean that if central bank uses this tool a lot, accidents are likely to happen. The central bank may have a timetable for exiting from its policy and waning its balance sheet. But of course, the fiscal shocks, COVID style shocks, monetary policy effects, they may not respect the timetable of unwinding of the balance sheet unless these things are beautifully orchestrated and calibrated in some way. Of course, you can't coordinate with a COVID shock. So in my view, the lessons are that central banks may really have to feel the stones for fragility while they contract their balance sheets because there could be this dispersion of liquidity risk and an overall ratcheting up of liquidity risk both happening at the same time. Second, it says that there's a trade-off between monetary policy and financial stability here. Too strong use of the balance sheet tool means you are increasing vulnerability through runnable private money creation. And simultaneously now when the monetary policy tries to tighten for inflation purposes, it now runs the risk of actually triggering a run on some of these banks. So these are some of the trade-offs that we have to keep in mind. Personally, my view is that we really have to think hard about the scale, the scope and the duration of QE, which is that maybe it should be a very limited intervention at the time of a shock rather than something that the central bank keeps pursuing for months and years after the initial shock has withdrawn because then the financial stability costs start overweighing pushing on a string to get additional growth benefits from this big bazooka that central banks seem to be employing whenever there is a shock out there. Okay, so let me stop there and I'll hand it over to Bruno. We can move to Bruno for the next presentation. Thank you. Thanks a lot, Fabio. Hello everybody. It's nice to be with you and thanks a lot to Viral for this really very interesting and informative presentation. So I'm coming after you and I'm thinking, oh, what Viral has shown us is that there's been this huge increase in uninsured deposits and maybe that creates a big liquidity risk for the financial sector. And so to think about that, what I would like to do is to ask myself and yourself, what is it? What is liquidity risk? And in fact, I'd like to know, are we talking about liquidity risk because it's more reassuring than talking about solvency risk? So, okay, on which of these two feet should we dance? So maybe if you go to the next slide, I can start. Okay, so let's try to have a scenario of an adverse shock to a bank. Deposits, lots of people, a large amount of deposits, but now people start withdrawing. So we go to the next slide to see what happens next. And next, well, if your deposits are going, one way to cope with that would be to raise new funds, borrow maybe, or raise some securities. But maybe it's harder this time to do that. So then we need to go to the next slide. And then, you know, if people are withdrawing their deposits, then I have to sell some of my assets. Okay, so that's the adverse shock. And what I'd like to think about with you is, is that a liquidity shock? So let's go to the next slide. You know, it's, we need to think about the causality here. So we have two things happening. You know, deposits are going and I'm selling assets up at low prices. Well, maybe deposits are going and therefore I'm selling and therefore the price goes down. That would be liquidity risk. But maybe what's happening is my assets, the value of my assets has gone down. And that's why deposits are going. So I think it's important that we think about that, you know, what is the direction of the causality. So let's go to the next slide. And to think about, so basically, you know, the direction of the causality is really, do we have liquidity risk or, or, or solvency risk. So to think about this distinction, I think it's nice, you know, I'm a micro economist. Like to tell you about micro economics. So, you know, there's one thing, you know, people who do auction theory, they, they like to think about the difference between private, private values and common values. So when we bid in an auction, maybe we bid different amounts because we like the good differently. Maybe Viral, who is an artist, you know, he has a very sophisticated taste for art and I'm just a peasant, you know, and, you know, not valuing pieces of art at the same prices as Viral. So that's private values. And it could be common values. It could be that Viral being in New York is very sophisticated and he has private signals about the value of a work of art. And if I knew the signal that Viral knows, I would have the same evaluation for the, for the piece of art. So how is that related to liquidity risk? Let's go to the next slide. If we are, you know, what does that mean, private values? What it means in a banking situation, it means that different banks have different valuations for the same assets. So there's Bank A, which has extended the loan to a company and that bank knows the customer, knows the company, knows how to monitor it, knows the business, knows how to interpret what's going on in that firm. So they are good at holding this loan. And then there's Bank B and they don't know anything about this company. They don't know about this sector. They're not very good at holding this loan. So now Bank A values the loan more than Bank B. So if the deposits are going from Bank A and Bank A has to sell, then the asset will be sold from Bank A to Bank B. And there will be a drop in price reflecting that Bank B is less good at holding this asset. That's private values. But when the thing that is sold by Bank A to Bank B is treasured rates, do we think that there is a difference in the way in which Bank A and Bank B value treasuries? No, I don't think so. So if at that price, if at that time when Bank A, people have been withdrawing deposits from Bank A and Bank A has been selling, and suddenly we realize all the prices of the assets that Bank A are selling are very low, well, maybe that's not because of liquidity problems. Maybe that's because of solvency problems. The value of the treasuries that Bank A was holding went down. And that's why people withdraw their deposits from the bank. And that's why when the bank sells, well, we see that the assets are sold at a lower price than their book value. But it's just because the book value was not marked to market. So let's go to the next slide and then the next slide. So if we want to have a look at, that's going to be my empirical moment. So if we want to look at Silicon Valley and Credit Suisse, do we think those were liquidity events? Not 100% sure. Silicon Valley Bank held a lot of treasuries. Well, treasuries, there's not much of a liquidity aspect to the sale of treasuries. There's not a lot of private values aspect. It's just that the treasuries that Silicon Valley Bank was holding, well, their market value had gone down, but it hadn't been marked in the books. So the assets, the value of the asset goes down. People see that they say, oh, let's withdraw our deposits because of that SVB has to sell and sells at a low price, which is its market price. It's not a liquidity problem. Credit Suisse, well, Credit Suisse is a fantastic bank. They did amazing things. It's this bank. The governance problems inside these banks are so huge that, frankly, I can understand why investors would lose confidence in the value of this bank. What is the value of this bank? The value of this bank is its ability to do business. Well, do we have the asset, but its ability to do business? I think we do. So value goes down. People withdraw. And again, I would not call this a liquidity crisis. I would call this a solvency crisis. So let's go to the next slide. And so that was just two examples. Now, let's have a more general. So that's going to be my second empirical moment of the day, maybe of the year. So here is a great study by John Matvos, Piscorsi, and Seru. And what they did was they tried to evaluate the value of the assets of American banks. A lot of these assets are not marked to market. So when you look at the book value, it looks high. But when you market to market, maybe it's different. So they did that. They marked the value to market. And what they saw is that really, as the interest rate had been going up, the value of the asset had been going very, very low. And they write, you know, 10% of the banks have larger unrecognized losses and lower capital than SVB. Almost 190 banks are at potential risk of insolvency. So is it, what's the big thing we should worry about? Is it liquidity risk? Well, maybe it's not the only thing we should worry about. So let's go to the next slide. So when you ask a Jesuit a question, the Jesuit will answer with another question. And when you ask an academic a question, the academic will tell you, this was not the right question. So this is what I'm doing right now. Maybe we should have asked another question. Let's go to the next slide. So now let's think about Europe, you know, and based in Europe, I care a lot for Europe. Now, for the US, we have a lot of really interesting papers. You know, we have the paper by the Iran and its co-authors, which is really interesting. We have the paper by the paper I quoted by John Maxwell's discord in Syria, really interesting. And my colleague, the young female also has a very interesting paper. All these papers that really document, you know, the extent of liquidity or solvency problems in American banks are based on the very rich data that is available about American banks. And then, you know, being European, I asked myself, oh, what is the situation in Europe? Well, I can't, well, I can't answer because I'm not an empiricist, but even if I was, I could not answer it. I could not answer because the data is not available in Europe. So maybe one policy implication of all this is we should make the same data available in Europe as what is available in the US. I think if we don't do that, maybe it's useless to talk about liquidity risk in Europe because we don't know. Thank you very much. Thank you Bruno. So we can move to the next presentation by day. Yeah, so thank you very much. I'm very happy to be part of this panel and clearly have subscribed. You know, what he does, but just say that what we observe clearly is largely a solvency crisis rather than a liquidity crisis. But what Viral showed, I think, in his presentation is that even if we were aware that the increase of interest rate was reducing the value of the asset of a significant number of banks, there was one day where there was the run. And this is something that we observe, is the first time that we observe this huge amount of money take out from a bank in such a quick time. So if you're thinking to leverage ratio, I'm sorry, liquidity coverage ratio, the amount that a liquidity coverage ratio will predict for the SVB to cover liquidity demand for 30 days were far lower than the amount that has been taken out in one day in that bank. So this is also something that is, of course, it was a solvency problem and so on, but it's telling us also something else about our let's say macro prudential indicator, or let's say ratio that we are imposing to prevent, let's say, the possibility that there will be a run. So being sure that banks are having enough buffer of liquidity being able to answer to, let's say, the withdrawal of deposits. So this is why what we observe, it is true, it was a solvency problem, but it's also challenging us a little bit more about liquidity issue. And whether, from the bank potential point of view, we do have a liquidity ratio imposed that are enough to prevent, let's say, a liquidity problem that can be generated by several reasons, panic, contagion, and so on. So one point that it has been also stressed is that what we observe, it was largely due to the fact that there was a lot of deposit was uninsured. And this is something that is present in the US, but we don't have data. So I also echo Bruno on asking for having this data for Europe, of course, but we do have also in Europe a significant fraction of uninsured deposits. So clearly these things do have that our banks can be subject to this type of risk in general. And if you're looking to the history, when banks either have run or are subject to default risk, there will be some attempt to do some bailing. So try to use part of the liabilities of the bank in order to respond to the losses that the bank is facing, but we never observe that uninsured deposit as being bailing. And this is why, based on this observation in March, we can move to the next slide with some of my colleagues at SAFE. We were thinking on, it is politically, not only economically, maybe from the economic point of view, it is good to have that uninsured deposit will be bailing in case of a run. But with all the complication that this is having. But politically, do we really believe that this is the case? And if it's not the case, so if we will never really bail in uninsured deposits, can we really consider them bailingable? Or it is better that the exante, we start to treat them as not bailingable. And then try to impose to bank requirements not only based on for deposit insurance on the amount of deposits that are insured, but maybe with different levels also for the amount of deposits that are not insured. Because at the end, there will be a bailout and these deposits will be covered. There will be no losses on this. So what we are asking is not that it is optimal. In a fantastic word, it is optimal to have that people run if a bank is not solvent. But if you're looking to all the potential spillover effect and we know empirically that politically this is not something that you can do, then maybe it's better that we start to think on how to have a sort of deposit insurance or assume that also the uninsured are actually implicitly insured and then start to require to banks to or at least someone, maybe the same depositors can contribute to the fact that these deposits sometimes they will be indeed insured. So this is what we want to make in terms of issue regarding increase of interest rate, the fact that it is creating this sort of potential financial instability and can create funding liquidity problem. But what this increasing interest rate was not, it is not just producing funding liquidity risk, but clearly, and now we can move to the next slide, it is also generating a lot of volatility because this interest rate are increasing. Now they are evaluating the possibility that maybe the central bank will stop to increase them. They will move down then to maybe a reduction. So clearly, it is not only the level of the interest rates that we are observing in the market that is relevant for, in this case, market liquidity, but also the volatility, so how much we are changing it through time. And from this, I'm taking this beautifully graph that has been produced by Darrell Duffy, Fleming and a group at the Fed of New York, where they are using different measures of, let's say, of liquidity. We can discuss bidder spread, round trip cost, whatever, you know, they do a principal component analysis of this different measure of liquidity. And they show that of course there is a strict relationship between increasing volatility in the yield, in the treasury market, and this measure of liquidity or illiquidity. So illiquidity is increasing when volatility is increasing. But this story is not only this. The story is that on top of these strict linkages between volatility in the yield and liquidity, there is also some friction in the market that prevents the usual provider of liquidity, the market maker, to continue to provide liquidity. And if you are taking out the component of the illiquidity that is driven by volatility, and we look to the residual, we can move to the next slide, they have this other beautiful graph that they are looking to the residual. So taking out the volatility, what is remaining in the illiquidity measure that we can explain. What they find is that it is really the average capacity of utilization of the balance sheet. So how much the classical market makers that are also banks do have the possibility via their leverage, capital requirement, via all the type of macro potential measures that we are imposing after the global financial crisis. You can see that there is a strict relationship between having less capacity. So utilizing more of your capacity, higher than is the illiquidity of serving the market. So the illiquidity that is of course generated by the increasing interest rates in the market and increasing volatility. It is also affected by the fact that we use several macro potential policy in order to solve a lot of problems first in solvency, but it's not only having issues in terms of funding liquidity, it might create problems also in terms of market liquidity. And then the question is, are we revising these macro potential, let's say requirements, or are we thinking to something else? We know that this type of issue in terms of liquidity is not something that happens all the time, it's just for a short period. So what we observe so far in the market is that maybe these spikes and increasing volatility and spikes also in increasing the yield for a short period that is related not only on the secondary market of the bonds, is related also to the repo market, can be solved in other ways. And we now move to the last slide that I have, that it is the possibility that the central bank are intervening. So liquidity problems are not solved just by lending the last resort by the central bank, but is solved also by the central bank being the market maker of last resort. And this is a document that has been produced at the advisory scientific committee, where both me and Bruno are also members. And again, in this document we are not claiming that we need to have a market maker of last resort, but if central banks decide to intervene as market maker of last resort, they need to have some rule. And these rules are very, you know, also common sense, you know, do it not so frequently, not for long term, make it very painful for those that are using this possibility and so on. So, you know, we need to start to discuss also to this possibility. And then there is another paper by Eric Operotti that he produced this let's say document saying, okay, but if the central bank has to intervene, it shouldn't intervene for any type of asset. We need to have that for the risk-free asset, we need to be sure that there is this low volatility, because there are dense flow over because this asset are used as collateral, there are flight equality and so on. And then there is this other very nice document produced again by Darrell Duffy and Franklin that are gone on the same line, you know. We do observe a lot of events when a risk-free asset like the US Treasury is having problems, is having problems in terms of spikes in the yield, is having problems in terms of liquidity. This is having issues also in the repo market and now central bank, it can be all due to the QE and the fact that, you know, all the points rise by viral, but the fact is that now the central bank is responding in different ways. You know, doing, for example, the security lending facility. Then there is the issue, are we allowed in everybody to get access to central bank or only banks for this security lending facility? Are we able to solve this problem? Maybe not. We need to think to it more deeply. And then the last thing that they are doing in this document is that maybe if we have issues in terms of liquidity in the most safe asset is the Treasury, there could be a fiscal answer. You know, it is the Treasury that directly is intervening in this market. He will make a huge amount of money. He's issuing at 100 and then he's buying it back at 60. He's making money and he's providing liquidity to the market. So, you know, they're all in explore areas that we need to think seriously. What is the better way to answer to all the issues that so far increasing interest rate or maybe the last reduction before due to the QE is going to generate in terms of liquidity, both for funding liquidity and for market liquidity. And I'm stopping here. Thanks so, Oriana. And now we move to the last presentation by Dave. Hi. Can I just check you can hear me clearly because we've had some technology issues. Yes, we can. Great. Well, look, thanks very much. For the introduction for the introductions and it's great to listen to the other panelists. I'm honored to have been invited to this conference today to contribute to this subject as important and as topical as liquidity risk in a high rate environment. And let me have my perspective as the deputy governor responsible for the Bank of England central banking operations and use of our balance sheet, including to backstop liquidity. And also I should say as a member of the financial policy committee responsible for financial stability issues, the UK counterpart of the ESRB. I think it's pretty obvious why this subject is so topical, but just let me just recap on three key points. First, with markets expecting that rates will remain higher for longer when compared to the very low levels that prevailed up to the pandemic, market participants will be looking at whether the factors that were responsible for low interest rates are likely to persist going forward. Second, I don't judge that there are any financial stability grounds for adjusting our approach to monetary policy or the level of interest rates. And in fact, in the UK return inflation to the UK target will support financial stability. But undoubtedly the transition from a long period of low rates to higher rates, while necessary to bring inflation back to target has affected households and businesses as well as individual financial institutions as many speakers have highlighted today. And thirdly, given my responsibilities to the bank's balance sheet, I'm well aware of the importance of ensuring we use our balance sheet to deliver our financial stability as well as our monetary stability remit, including the considerations of the consequences as well as trade-offs as previous speakers have highlighted. And now, the other panelists in this session and early ones have already focused on the important topic of the liquidity risks banks face. And where I want to focus my remarks is on the conjunction of structural changes, liquidity and interest rate risk impacting on the MBFI ecosystem, which we've also just been hearing about. Recent events have revealed that shocks can uncover vulnerabilities exacerbating rapid or sharp moves in market interest rates independent of the impact of monetary policy, leading to additional stress in the financial system. And as I'll go on to briefly describe, there's ongoing work here at the bank to strengthen resilience, as well as developing new backstop facilities to tackle severe instances of dysfunction that could threaten financial stability. Now, of course, liquidity risk is a very old concept. But as markets have evolved, so have the liquidity risks the financial system faces, along with the response that we and other central banks have been making. Following the global financial crisis, banks, insurers and CCPs both in the UK and globally are generally better regulated and more resilient to shocks. But partly in response to that better regulation, we've seen the shift that many have talked about today in financial activity away from banks towards MBFIs. And simultaneously, there's been a significant rise in derivatives trading facilitated by centralized clearing and the now ubiquitous use of collateral, notably government securities. And this has increased the importance of liquidity risk management, which has been at the heart of recent stresses in the UK and global financial systems. And the leverage across MBFIs has proven to amplify this risk. Now, while some exposure to interest rate risk is a natural byproduct of desirable functions that financial institutions perform, unchecked exposure can create risks. The widespread use of derivatives and repos for interest rate hedging mitigates idiosyncratic risks from rate changes but creates liquidity risk to manage. In particular, it creates exposure to liquidity risk by marginal collateral calls when asset prices move. In volatile conditions, these calls can exacerbate mismatches in liquidity supply and demand, causing sharp adjustments, sharp price adjustments and further negative feedback loops. We saw this in the UK LDI funds last autumn and in the Dash for Cash in Mark 22 as Klaus, Lewis, John and other speakers have highlighted today. But how do all these dynamics interact? Financial institutions are exposed to and must manage that interest rate risk, but interest rate risk and liquidity risks are intertwined and the speed of a given move in interest rates and asset prices matters more than the level of interest rates for liquidity risks. The growth of NBFI has increased the systemic importance of NBFI's collective liquidity risk management and where they do run short of liquidity, they have the potential to create material risk to financial stability and for many institutions the past couple of years have marked their first exposure to not just higher but also more volatile rates markets and is thus a test of their risk management practices. Having highlighted the developments in liquidity risk, let me set out what central banks are doing now. First, it's important to keep stressing the first line of defence as effective risk management by financial institutions themselves. That's been a common theme throughout this afternoon's fascinating conference. But we know the role of NBFI's is growing and as a result the bank has expanded its work beyond traditional bank stress testing and last week we launched the system-wide exploratory scenario or SWES which aims to improve the banks understanding of the behaviour of banks and NBFI's when they're transacting under stress. The SWES scenario comprises a severe but plausible stress which is faster, more wide-ranging and more persistent than those seen in the recent periods of market instability I've highlighted includes a 10-day shock to the financial system with a very sharp move in rates and risky asset prices and what the SWES will allow us to do is enhance our understanding of how the NBFI ecosystem sits within wider financial markets and to consider how these interactions with other participations can introduce or amplify stresses and shocks so we'll learn more about the interconnections in the system which speakers in the last session in particular highlighted. More broadly, the UK Financial Policy Committee has recently set out its approach to assessing and managing various risks in NBFI or market-based finance. In a number of areas such vulnerabilities have already been identified and action has already been taken including response to the LDI crisis last year. I'd be happy to talk more about that in the discussion as well as on the interaction with monetary policy which Fabio Flagdan is opening remarks. Furthermore, UK authorities will publish a consultation paper before the end of the year on reforms to improve resilience in money market funds. Now, market-based finance vulnerabilities are not something we in the UK or indeed any one jurisdiction can tackle alone. The bank and authorities internationally remain committed to improving the resilience of the global financial system. So I'm echoing here what many speakers have said earlier. Recent efforts internationally include the FSB's Money Market Fund Policy Proposals which should now be implemented at a domestic level. The bank and other FSB members are working on new proposals to improve margin practices. The FSB published a report on the financial stability implications of non-bank leverage and are now working on policies considering leverage in NBFI's. And both the FSB and IOSCO published guidance or policy proposals to address liquidity risks in open-ended funds. So all of these familiar but very important actions that we've been hearing about today. So now we've taken steps to understand and mitigate system-wide liquidity risk. We continue to introduce and build upon measures to appropriately address systemic vulnerabilities. And as I've stressed, firms themselves must have appropriate risk management in place. However, while we can work to build better system-wide resilience to risk, we cannot ensure against all states of the world. And where we identify crystallizing risks with the potential to cause systemic financial stability, we, along with colleagues at the ESB and other central banks, have been wrestling with questions of how to ensure central banks have the appropriate tools to be able to respond. Loriana and Viral have already touched on some of the academic thinking on options available to us as central bankers. The banks' long-standing sterling monetary framework has the ability to support banks during liquidity shocks. And in many cases, this will be sufficient to provide indirect liquidity to their NBFI clients. However, recent years have shown that when shocks are particularly extreme, banks may not be always willing or able to lend in sufficient size and speed to stop shocks from amplifying through to call market dysfunction. Accordingly, we at the bank are working to develop a lending tool for NBFI to backstop market functioning in core sterling markets in the exceptional circumstances where there's a threat to UK financial stability. Designing this tool requires balancing its effectiveness in underpinning financial stability with ensuring it doesn't encourage greater risk-taking or put excessive public resource at risk. And as a first step, the bank is designing a facility open to UK insurance companies and pension funds. And as a second and parallel step, we're exploring how access might be expanded to other NBFI sectors over time while still meeting the backstop principle. It's crucial to stress that this tool is not aimed at providing insurance for individual firm-specific liquidity stresses and hence will not absolve firms of their responsibility to maintain robust self-insurance. That's why it's so important that domestic and international work to improve NBFI resilience keeps pushing forward. So to conclude, over the period since the global financial crisis, the nature of liquidity risks has evolved. Interest rates are likely to rain higher than for most of that period and firms must make sure they are able to adapt and manage their risks in a higher rate world. It's important firms make sure they are protected against interest rate and liquidity risks, including during severe shocks when rates can change quickly and under different monetary conditions for the level of rates. And since at a system-wide level, liquidity needs are higher than they were, free global financial crisis for both banks and NBFIs, our steady state supply of reserves will need to meet our monetary policy objectives but also support our financial stability objectives. The bank and the FPC in the UK will continue to monitor liquidity risk dynamics and ensure the system is appropriately resilient in tandem with complimentary activities by authorities in the EU and other jurisdictions that we've been hearing about today. The bank will not provide insurance for individual firm liquidity mismanagement. However, when exceptional and systemic circumstances threaten UK financial stability, we stand ready to tackle these risks while ensuring that we avoid creating new forms of moral hazard, going with the flow of the system as it were, but not adding to those flows. And I'll stop there. Thank you, Dave. So I think we have a few minutes now for a panel discussion. I'm going to throw out there a couple of thoughts, questions, and you may react to those or react to the presentation itself after you. I think one is if you... And that was to Loriana's point about the interest rate volatility. If you look at where US rates were in March when all the SVB troubles started, the US 10 years went from three and a half to about four. Then, of course, in response to the central bank intervention, the rates came down. So it was essentially a 50 basis point run up to the March. Since then, rates have gone from south of three and a half to north of five and then come down a little bit again. And volatility, if you look at like one year's option, 10 years' option, it's actually higher now than it was back in March. So why we haven't seen the same kind of cracks that potentially were visible back then? Is that because the central bank stepped in? So that's one issue. Another issue I think in terms of rates to think about, there are not only the level of rates of the volatility, but also the reasons why rates move. They can move higher for good reason, the economy, the recovery, our start. They could move higher for other reasons, like lots of discussion about fiscal outlook, for example, here in the US. So it's said differently whether this is about the expected part of policy, the real part, or it's about term premium. So how to factor those considerations? We wanted to think about the liquidity feedback to solvency and the role of some of the players here. Before you jump in, or again, did it touch on this or we can react to your own presentations? Yeah, so I'm happy to start with the first question. Kelly, I cannot say that it is all due to this, but there was a significant change in the policy of the Fed after the SVB case that you can get liquidity from the central bank with the collateral value that is not at the market to market, but it is at the par bay. So clearly this means that you are able to get access to the lending facility of the central bank, not based on the value of your asset, but on the theoretical, that's a nominal value of your asset. And this is clearly helping the banks to be able to respond to the first wave of the run and is telling to the market also that clearly whatever will happen, there will be some sense, the possibility by the banks not to account the losses that they are having, their balance sheet due to the increase of the interest rate. So this is something that we need to keep in mind when we are comparing what's happened in the past and what's happened then later on with a huge increase of the interest rate. If I could just jump in. I don't have a comment on this on a specific country or the central bank, but I do want to take a pause and just give you my sincere concern about what's happening in advanced economies and central banking. I've been at the Reserve Bank of India as a deputy governor and all of this hyper activism about wanting to intervene in government bond markets at all costs, support non banks, support banks, support auctions of the government. It's really a very, very slippery slope. At some point, you don't keep track of what's your monetary objective and what you are doing is quasi-fiscal. And there is no Chinese wall. There is no Chinese wall inside a governor or a deputy governor's mind. It's all out there in the mix. All these decisions are being taken at the same time and even the safest asset class in the world that we are talking about right now is subject to very huge fiscal risks. So the solvency liquidity issues that Bruno is highlighting for banks, liquidity and asset quality issues are now relevant for government bond markets. We have seen this in Europe 10 years back. And I would ask the question, we intervened in European bond markets in a massive way with guarantees like the QE in 2013, then 16, et cetera. At the end of the day, I'm not sure we have solved fundamentally the growth and the fiscal problems. We keep using the same tools. We are trapped. Every time a fiscal situation arises in Europe, what's the solution? It's the ECB. And I think that, like, I'm just looking at this over a long period of time. I see this hyperactivity of central banking in every market, in every institutional space of the financial sector. This is what I thought was my problem as an emerging market central banker. This is exactly what I wanted to avoid to have to walk into the office every day trying to solve five problems at the same time. And it creates a complete lack of clarity of objectives. Markets can't understand what you're trying to do at what point of time. So it's a bit of a philosophical rant, but I just want to put it on the table that I think we should be very careful about these parts that the central banks are wanting to embark upon, that there's a whole history of emerging markets, central banking, its fiscal dominance, its financial dominance. And anyway, I'll stop there. Yeah, if I may, I would like to step in and continue on what my companions have been saying. I was quite impressed by what Dave said at the end. He said, the Bank of England will not let any mismanaging bank do what it is doing except in exceptional circumstances. Unfortunately, we have seen a few of those in recent years. And I'm a little bit worried also, like Viral, about the extent to which central banks are intervening in markets. And I think my view on this is it would be better to set incentives right ex-sante rather than doing things exposed. And on that front, I was very impressed by what Lorena said. I never realized that, but it seems like banks are not paying insurance premium on uninsured deposits. They're not subject to regulations that could make uninsured deposits costly for them. That sounds like a very dangerous thing to do because that's an incentive for banks to build up uninsured deposits. And as we have seen when banks have a lot of uninsured deposits, strange things can happen. So I think we should really focus on setting the incentives right ex-sante. Thank you. I'll just come up to Dave now in case you want to respond to some of these points. Yeah, thanks. And just to say, Viral and I used to both be on the Committee for the Global Financial System. So it's very good to be interacting with him again in his new role. And I mean, a couple of points really. One, to your thought, Fabio, on why we haven't seen further cracks as you put it. I mean, I think we should also refer back to some of the earlier sessions in today's conference where I think Pablo summarized the session on the lessons learned from the March bank failures and did start by, I think, a position we all share that there were failures of risk management in the institutions. And that was something that I tried to emphasize in the NBFI sphere. And also, some business models have been more challenged than others, and those have been a source of cracks. But just to sort of respond to Viral's challenge, which I think is... And look, there is a very wide debate about this, which is an important debate. But it would also... My response would also pick up on the point you made, Fabio, in your opening remarks. When we intervened in LDI's last autumn, it was because we could see that there was a systemic financial stability risk in this core... in the core funding market that originated in this quite esoteric part of the NBFI ecosystem. One that we've all got much more familiar with. But we designed our intervention then to ensure it was targeted and temporary and so didn't contribute in any sense to the ratcheting up or the extension in footprints that I know Viral is worried about. We went in... We were very clear to Bruno's point, not just Bruno's point, but we're very clear in terms of kind of L'Oriana's framing, ex-ante that we were going to go in in a certain segment of the market, that it would be a temporary intervention and that we would be selling these assets back as quickly as we could. And we were successful in that. We did have to pause our quantitative tightening asset sales for monetary policy purposes while we carried out this operation because we were nervous about the degree of market dysfunction and that was one of our principles for not going ahead with QT. So that was perfectly consistent with our kind of assignment of objectives to monitoring financial stability. And as I tried to set out in my remarks, asset purchases wouldn't be my first best way of intervening, which is exactly why we're trying to develop a broader MBFI intervention approach around a repo tool that would be a more sort of standing facility but which would only again be used where there was a real systemic risk. So I'll stop there. I'm sure the debates will continue, but I hope that's contributed. Maybe if I can add one more question to the debate. To the extent that you move the central banks move in this direction of thinking about MBFI access to the central bank, obviously there's going to be different circumstances in different countries, different mandates, but how should the communication be changed, if at all? And also whether there is a need to reconsider the way the regulatory perimeter should be, right? So if you come inside of access to the central bank balance sheet, where should the regulatory perimeter be at that point to make the central bank comfortable with that? I mean, on the communications point, I think it's really, we've discovered through last, you know, last autumn's LDI, but also our role during this march is banking stresses on the importance of very clear and consistent communication. I mean, that's always been the case in the monetary policy space, but I think really setting out not just what you're doing it, but why you're doing it, how you're going to do it does contribute to being able to distinguish between something that is monetary policy, something that is financial stability, but I'll be, I mean, we've said this in other fora, I'll be honest with you. I think when we, I'll be open with you, when we embarked on our interventions during the LDI episode, we had to keep stressing that these were not quantitative easing transactions because I think it, and we had to say it multiple times over multiple days. And I think the message finally got through after about two weeks of doing these interventions that we were just targeting the long end of the yield curve and that we were, you know, that we were only holding these for a particular purpose and that we planned to sell them again, but it took a long time and sell them quickly, but it took a long time for the message to get through. So I think there's definitely a lesson there for all central banks in terms of taking this kind of approach forward. I think, you know, we do need to, in the case of what we did on LDIs, we had to work very closely with other regulators who were responsible for the regulation of these funds, you know, I think there will always be lessons to learn about where the perimeter lies. You know, at this time on a Thursday evening, I probably won't get into suggesting any changes to the perimeter, but it's a fair, it's absolutely fair that as one of the lessons we have to learn and in particular as we enter more and more the NBFI space, you know, how is the regulation best set up? Can you just chime in there, Fabio? A couple of points. One, I think I agree. I think the articulation of the monetary and the financial stability objectives, not being in conflict, I think could be achieved, I think, if done well. And I think I agree that at least my assessment was I think Bank of England did a very good job, both in communicating as well as implementing the limited time intervention. I think the challenge I see is the following and I'd be curious to see what Dave has to say, which is I think my sense is that the financial stability challenge is really over time, which is that every intervention revises the market's priors about what is the line that the central bank is willing to cross for the next intervention. So for example, with the COVID facilities, however justified they were given the humanitarian crisis and financial market crisis we had on grounds, there's a very nice paper by Ellen Moreira, Valentin Haddad and Tyler Muir of UCLA and Rochester, which shows that even though the Fed facilities expired in December of 2020 for the corporate bond markets, if you looked at the pricing of the credit default swaps relative to the pricing of equity of companies, the credit markets were basically pricing that there's no tail risk of default on these companies, very, very low. So relative to the equity option market implied volatility, the credit markets were implying very low volatility for these products. And I think the explanation is that you created an implicit put through the COVID facilities and the facilities are over, they've expired. So the communication is clear that this is no longer available. But I think it's really a reflection of the two big to fail markets expectation. And I think what's happening over a period of time, even though each intervention looks justified at that point is that starting with intercontinental banks failure in 1984, we started creating a two big to fail expectations in the banking markets and then after 25 years, it came out sort of like full force in the global financial crisis. I think my fear is that we are on a very similar path of two big to fail markets because we have lost the capacity to deal with market volatility. I think we are responding to any and every failure that occurs. I'm again not talking about a specific market failure. But I think that's why I called it hyperactivity. I think the central banks want to sort of intervene in every market that's showing sign of turbulence or volatility. But I think that's what markets are about. That's for the markets to figure it out. They have to go through the leverage, et cetera. Anyway, that's one point. I think a second related point is that I think this idea of extending the backstop to NBFIs is interesting, but it raises two difficult questions. One is in what way then are NBFIs different from banks? Because if you are giving them the backstops, are we then regulating them in exactly the same manner? And then the second question I have is, doesn't it then undo the objectives of the post-global financial crisis reforms where we said, okay, we'll put some hard lines on the banks so that some activity moves to non-banks. And then if they fail, we don't have to step in. We don't have everything that's really within our payment and settlement system. So I think we would have to answer these two questions along the way if we also want to expand the backstops to the NBFIs in my view. There are a couple of questions from the Q&A, maybe unless Dave wants to reply, I will move to those. So those are two questions from Grisha Portes. Yeah, is he online? Is he online, Richard Portes? Yeah, there we are. I've been unmuted. Okay, very good. Please ask your question, Mikey. Thank you for releasing me from the constraint. First, to Loriana, on unlimited deposit insurance. You know, it's not correct to say that depositors have always been made good. In Cyprus they were not. And we know some of our closest friends and colleagues lost a lot of money with their funds over 100,000 euros in Cypriot banks. And now, question is, did that have any effect on depositor behavior afterwards? Not necessarily in Cyprus, but elsewhere. You had a demonstration that, hey, people could get, people could lose a lot of money, and they did. But what's the lesson here for moral hazard or not moral hazard and the universality of deposit insurance? And for Viral, I sympathize, and yet I ask myself, which of the specific interventions you would say the central bank should not have made? Should they not have gone in to help the money market funds, let them crash? Should they have, should the Treasury market have been allowed to crash completely? Should Dave and his colleagues not have intervened to stop the gilts markets from crashing completely? They'd already crashed a lot. At what, you know, which of these interventions you specifically say, oh, they weren't justified? And where do we, how do we draw the lines here? So I think Viral wants to respond. Yeah. Yeah, I think it's a good question. My view would be that if you're not going to get powers to regulate the leverage of the entities you are backstopping, it's best not to intervene and let the market volatility play itself out. I think what we have happening, Richard, right now is that the central bank has the capacity to expand the scope of its lender of last resort under the legal statute. Okay. The governance of the central bank allows that to be done. It may not be to a specific entity. You can structure it as a liquidity facility for the entire market or an asset class. And the central banks are doing this. And what the central banks are not doing then is to turn around and ask their governance authorities, give me the rights to regulate the leverage of these entities. We are not regulating the leverage of the derivatives market of pension funds. We did not get central banks did not secure the rights to regulate the leverage of money market funds. That remains with a different regulator, the SEC. So my sense is that either you have to invoke the systemic exception through the, in the case of United States, it would be through the financial stability oversight council. You have to recognize that money market funds are systemic as a herd, and then automatically the Federal Reserve gets the oversight over the money market funds because they have been designated as CIFIs. So I think the challenge I see right now is that for the right reasons exposed, which is the time inconsistency of the lender of last resort policy, we keep extending it, but we are not extracting rights to regulate these entities. I think this is untenable. I think this cannot, this cannot continue. It's just a license for the private sector to take risks with the central bank put being exercised every time it blows up, you know, so. If I can say a word very briefly, I agree with what Viral said, and I also stand in the debate between Richard and Loriana. I stand on the side of Loriana. I, you know, maybe the friends of Richard who had accounts in Cyprus were not politically influential enough to ensure that the European Union would bail them out. It's quite, you know, it's a political economy question, you know, really exposed. Do we bail out or not? Well, it depends on the political power of those who would suffer from not being bailed out. And so as soon as the people or the institutions or the banks concerned have political power, we know they're going to be bailed out. John. I will give you privately an example of somebody who did have political power and was not bailed out. The only thing I wanted to add was on, well, two points. One on this point of Viral has made a couple of times around ensuring access to central banks, balance sheets that the institutions that get access are appropriately regulated. I mean, as I stressed and others have stressed today, you know, in the case, for example, of open-ended funds, you know, this is not, you know, a type of intermediary we're looking at to give access in the first group. But you've got an example there where the liquidity risks are being addressed both by the FSB and IOSCO. And then I think it's for bodies like the FPC in the UK or the ESRB in Europe to reassure themselves on the financial stability risks and central banks, you know, as it were, fit into that ecosystem as appropriate. The other point I just wanted to emphasize to Viral was one of the reasons for doing QT in the UK and as other central banks are embarking on is to ratchet back down the balance sheet. So I think we are conscious that the balance sheets have got very, you know, very large through time and in order to create the space so that they can be used appropriately and in a targeted way, whether it's for monetary stability or financial stability, that's exactly why we're, or one of the key drivers for why we're ratcheting them back or unwinding the ratchet, whatever the right way of framing it is. I just want to let Floriana chance to respond if she feels like an enemy in Europe. You know, just one thing that of course, you know, Richard, I see and I'm aware of the case of Cyprus, but the fact is that there is a significant difference when, you know, it is the usual word to be to, you know, maybe exactly. Cyprus was not creating contagion. So, you know, you get the bailout and that's it. What we observe instead now in the US, even if it was a small bank, they will face already the issue of contagion and at the end, it was a bailout, you know, not officially, but it was a bailout because as soon as you allow to get funding with a NASA that has a value that is not the face value, this is a sort of bailout that you're already doing in this case, you know, and actually for the SVP case, the uninsured deposit didn't lose money. So, you know, it is a market footprint that we are continuing to give. You know, Cyprus is one exception that I don't think is changing completely the expectation of the market in terms of the fact that uninsured deposits will be bailout. Okay, so we ran a few minutes over, so I want to thank everyone on the panel for the presentation and for what it was a super interesting discussion and then obviously the audience for having listened to us. So thanks again and I give the floor back to the moderator. Thank you very much, that was great. Bye-bye. And on behalf of the ESRB and the ECB, thank you very much for the discussion and thank you to the chair Fabio and the panelists. Really interesting. Seems like you could have gone on for another hour, but we are coming to the conclusion now of the conference and for the concluding remarks. I'm happy to hand over to Francesco Mazzafero, the head of the ESRB secretariat. Francesco, over to you. Thank you very much, Connie. So it has become a tradition and I say a great honor for me that in my capacity as head of the ESRB secretariat, I'm closing the annual conference of the European Systemic Risk Board. As always, I will not try to summarize the rich discussions we had, but rather to draw conclusions from the perspective of where I work and how I see things myself as a practitioner of macroprudential policy, I would say. In other words, somebody who's sitting at the meeting point of all work helps ensure that the key insights are brought to the attention of our policy committees up to the most senior level. The ESRB mission is anchored in its mandate, identifying and helping to prevent or mitigate systemic risk in the European Union or in part of it. I will therefore briefly reflect on what the ESRB did last year. I will then consider how the ESRB secretariat can further help ensure that the ESRB mandate is properly delivered in an age of what I will call radical uncertainty, borrowing the terminology used by John Kay and Marvin King in the book published in 2020. I will finish with some more structural consideration on the crucial role of data in this context. Let me first review where the ESRB has formulated public positions in the interval between these and the previous annual conference, which took place early December 2022. By then, the ESRB had just issued its first general warning on medium-term risk to financial stability in the economy. The ESRB Chair, Christine Lagarde, has already discussed it in their opening remarks. In early 2023, the ESRB focused on a sector that has been strongly affected by the pandemic and the structural change it has caused, as well as by the rapid rise in interest rates. I am referring to commercial real estate, which presents some systemic risk profiles. The ESRB issued a recommendation to the EU and national authorities on the need to improve the monitoring of systemic risks stemming from commercial real estate. This implies enhancing the supervision, not only of banks, but also of other financial institutions. First of all, investment funds active in the sector. With the benefit of hindsight, this was a much needed step if we consider some of the fallout seen in recent weeks. In parallel, we also pursued our work on cyber risks and published our assessment of how traditional macro-potential policy tools might help reduce stress if the propagation of cyber attacks undermined confidence in the financial system. I can't testify to the progress which the Joint Committee of the European Supervisory Authority has achieved over 2023 in the implementation of a previous ESRB recommendation. The build-up of an EU-wide coordination framework to react to systemic cyber incidents also in line with the implementation of the Digital Operation Resilience Act, DORA. This also proved to be a much needed and timely step. The exposure to cyber attacks is in fact considered today by the industry as one of its most acute vulnerabilities. For instance, you have certainly read about the very recent ransom attack on the US subsidiary of a large Chinese bank which has threatened disrupting trades in US treasury markets. In these hours, apparently, some systemically relevant settlements have even been performed by US B-Stick. In spring, we considered crypto assets and decentralized finance. We proposed a framework for standardized reporting and disclosure requirements to identify interactions between the crypto sector and the traditional finance. By the way, Richard Portas has spoken on this has been one of the really author of the work in our framework. The so-called crypto winter of 2022 did not spill over to the mainstream financial system, but crypto seems to have bounced back somewhat and some mainstream financial institutions are keen to develop business based on crypto. Thus, we need to continue watching these developments and stand ready to address risks arising from crypto conglomerates and crypto-based leverage in particular. In summer, we published a report on systemic vulnerabilities in the investment fund sector, focusing on assets that are inherently liquid, such as real estate, and assets that trade in markets that are not reliably liquid, such a corporate debt. This publication, which has been the result of many months of work, has been aligned with recent important legislative progress in the review of the EU Provincial Regulatory Framework for investment funds. The revised erectives on alternative investment fund management, also known as AFMD, and undertakings for collective investment in transferable securities, known as USITs, will soon enshrine new tools in their key communitair to enable fund managers to better manage liquidity in times of stress. The service stands ready to assist ESMA in the face of development and implementation of the necessary technical standards. OTUN has started with an increasingly acute awareness of the above-mentioned situation of radical uncertainty. What philosophers call the human condition is very much about not being able to assign precise probabilities to the materialization of risk we are facing in our lives. And yet, calculating such probabilities is at the very heart of our financial system. This is now being tested as we face new and unexpected challenges. Right now, we are witnessing two wars in the close proximity to the European Union. We are seeing climate change accelerating with an increased frequency of national catastrophe. And we are seeing new technological breakthroughs, notably artificial intelligence, on which Danielsson has been given really good presentation with opportunities but also threats that we are unable to fully comprehend. The world keeps surprising us with new potential threats to financial stability. This allows me to turn to my second point, the delivery on the SRB mandate in an age of radical uncertainty. I am optimistic for the use of macro-prudential policy. Many of the macro-prudential tools have been designed with the global financial crisis of 2007-2008 in mind, but they still have a role to play today. Where does my optimist come from, stems from the fact that at the time where more resilience is needed, the financial system in the European Union is already more resilient than in the past and relatively more resilient than in other regions of the world. In other words, to make use of macro-prudential tools to address new risks in a complex geopolitical environment, this would not hit the weakened financial system with a highly prosyclical impact. Let me show a focus on two points, capacity to withstand strained market conditions and regulatory framework. First, in the episode of instability experienced in spring this year, the EU financial system appeared resilient. We have not experienced that the banks run like the ones which affected the regional banks of the west coast of the US, nor the drama of a globally systemically important credit institution failing like in Switzerland. The strains in the pension fund sector which hit the UK one year ago have not crossed the Atlantic and the volatility of long-term yields in the US Treasury market has not disrupted government bonds markets on this side of the Atlantic. Of course, I see this with a great sense of humility. Indeed, we should beware of hubris. Moreover, progress on the regulatory side has continued in the EU, well beyond the above mentioned progress in the area of investment funds. Micro-prudential policy, the first line of defence will further strengthen banks and insurance cooperation once Basel 3 will be fully implemented and Solvency 2 will be upgraded. This was also the topic on which Pablo and his panels have been discussing today. Finally, the banking sector with only a few exceptions has seen much higher levels of profitability helping to increase capital levels. But there is an area which has been by the way mentioned by many who also feel that financial regulation in the US lagging, money market funds have shown to be vulnerable market segments and the SRB has issued two recommendations to address these vulnerabilities over the past decade. I would like to conclude with some reflections on data. The SRB Secretariat hosts some of the largest transaction-based data sets in the world. We have learned to provide the SRB detailed analysis of market microstructure which is so important to understand how liquidity conditions and risk concentration may exacerbate adverse market dynamics with potential systemic implications for the economy. For instance, we were able to analyse with a great degree of precision the market dynamics when some credit default swap prices overreacted in the days after the events of March this year in Switzerland. This illustrates what we can do with good access to data but we need to go further so I have three observations on data. First, while the EU has achieved important progress in providing access to detailed information to micro and macro supervisory institutions more is needed to facilitate the exchange of data among them. In fact, often access to data is granted by law to one specific category of supervisory authorities only under the wrong assumption that there would be no rationale for other categories of authorities to analyse them. We need to solve this issue and become more flexible in the way we share data and analyse them only in the face of new challenges. Second, I have already referred to new sources of systemic risk cyber, climate, crime, crypto which the SRB has discussed this year. Anticipating how the financial sector could be eaten by developments in these areas to which I would add geopolitical risks and artificial intelligence requires a comprehensive access to data. A lot of data are already available to supervisors so it is a matter of improving data sharing as I just mentioned. However, other types of data are not yet available. It's true, significant progress is underway in some areas such as reporting of cyber incidents. However, we need also to be realistic. We will never have all the data we may want to have to prepare for new crisis scenarios. It is therefore important that the SRB member institutions be ready to make decisions also in absence of complete information. Developing a higher tolerance to uncertainty in decision making whenever the strength of the financial sector is at risk. Third, our experience with analysing granular data permit us to document pervasive data quality problems. From a regulatory point of view this is contrary to the aim to create a more transparent financial system as we intended to do following the global financial crisis. Accurate data are key to the timely identification of ongoing market developments especially if they could lead to significant systemic dislocations. Therefore, poor quality of data should not be seen as a technical issue simply a sign of insufficient attention to detail. It could also be a symptom of deeper flows in risk management capabilities in some systemic nodes of our financial system like for instance CCPs. Looking ahead, the legislature should define clear responsibilities for data quality of reporting entities and if needed enable supervisors to sanction the most serious and persistent failures. I should not close this conference without expressing my gratitude to the speakers and participants at this event for the rich insights and discussions you have brought to this event. I would also like to thank my staff every merit of our common progress during the last year is mainly the results of your work. I would like to thank in particular the members of the management team my deputy Thomas Peltonin my advisors Emily Bow and Olaf Waken as well as the new colleague Ralph Jakob. I am also grateful to Andreas Westphal who retired recently. Many other colleagues should be named as well but at least would be too long. Let me mention now Shirley Simmons-Nokka and Eleanor Lanza who have been instrumental in preparing this conference. With this, I declare the 7th annual conference of the European Systemic Risk Board as closed.