 Thanks so much for being here. The idea of this panel is to connect the theme of the conference, credit booms and sort of the what's driving the credit cycle, getting deeper into that, and translating that or bringing that to the present. So we thought we have one start kick of the day with two imminent guests. To my left is Kent Riesen, who is a BCG global topic leader for financial stability of central banking capital markets. I have been a chair of the systemic risk committee, the director of Treasury before, and Till Sherman, who is a partner of the Financial Practice Office, and I call you Mr. Stress Tester, a seasoned bank stress tester, worked at the Federal Reserve Bank of New York before. And what we want to do is we want to talk about the current situation in credit markets and in capital markets. We want to find out, discuss where the risks are. There's been a lot of talk, especially about the leveraged loan market and worries there, and what is to ask Till to kick off and maybe give us your impression. Is that sort of the part of the financial system that is the most risky at the moment, and how big is the problem, maybe sort of the first-order problem, but also the potential knock-on effects on the wider parts of it. Thank you. That sounds great. Thank you for having me. It's quite an honor to be here at this conference and on this panel. So I want to talk about the three things that are kind of working my way towards the four of the questions. So the first is the question about bank capital. Is there a lot? Is there enough? And then the second one is about corporate credit, with a particular focus on the rich man. And then the third, I want to have a start thinking through how all this might react to the condition on a macro shot. And then Michelle's going to give us a probability of when that macro shot has been caught. So maybe to start with the obvious that banks are a lot more much better capitalized. Capital ratios are a double what they were about 10 years ago. And almost all of that additional capital has come in the form of high quality common equity. So you know that's nice. It's a lot more of it. But is there enough? Now this is a sort of question that I'm not going to be able to answer. It's not obvious to be an answerable. But one way to think about this is through the lens of no shock here, stress testing. And in particular the USC CAR program. The results from this year, the quantitative results are going to come out today after the markets closed. So I'm going to refer to last year's results. The amount of capital that the banks have participated in the stress test last year, and they represent almost 90% of the US banking assets, indicated that those banks had more capital after the stress than the entire US banking system had going into the crisis. So you know that certainly gives me some comfort that the banking system is pretty robust in the US and is to be able to withstand a shock as sizable or more because the stress scenarios that are wrong are worse than what happened during the financial crisis, which is a desirable thing. So that's one. Let's keep it in mind. The second is let's move over to credit markets. A couple of observations here. So first, the trend that market-based finance is growing and becoming more important continues. So if you look for instance, compare how the share of market-based finance for private financing in 2008 was about that relative to banks that's now closer to 60%. So banks are playing a smaller role. They're better capitalized, but they're playing a smaller role. If you then dig a little bit further, the problems are more in corporate debt than they are in consumer debt. Within investment grade, the rating that's grown the most by a long shot is the triple B or B double A rating. So a lot of institutional investors have guidelines. You can only invest in this class. Investment grade is certainly one of the classic guidelines. Yields are really low. So what do you do? You chase the yield. You still meet your mandate by going to triple B. That's the layer right above high yield. That is what Drupal stands for. In leverage finance, which is all of it is high yield, essentially most of that is single P rated or would be single P rated. That has grown to where it's almost the size of the high yield bond market now. So outstanding is about a trillion dollars. So that should worry us a little bit. We should actually worry even a little bit more because the borrowers that are being financed with leverage finance are getting more leverage. They have lower liquidity. Probably what's most dramatic is the investor protection, the lender protection that's on there. So called covenant light loans have gone from about a quarter of all leverage loans back 10 years ago to 85% now. So the bulk, the vast bulk of leverage finance is so-called covenant light. What could go wrong? So where is this stuff going? So a lot of this, most of it is going to invest in two non-banks. That is to say, CLOs, for instance, are very large buyers of this. And banks are actually, their main role in this is not to hold it. They hold less than 3% of the market. Their role is more to help with the construction of this, to originate and then pass it on. And even here, the warehouse lines, which is a mechanism by which this happens, have gotten much more modest relative to the crisis. So it's about 20 billion outstanding now relative to over 200 billion back in 2008. So far, so okay from the perspective of banks. So yes, there's a lot of increased risk in this, but it's happening largely outside the banking system. Now the trouble is, what now? There's a third but one half is conditional on a shock. So here one of the things we have to worry about is the financial accelerator effect. So the idea basically is, is a shock. And to what degree is the pullback of lenders, the financer is going to accelerate any of that shock through the economy. Non-bank finance is much more likely to pull back. They're much more fickle. So they're going to be very sensitive to any shock, which means that the banks are going to have to carry the load in helping, in helping weather the shock. But they bear a higher burden now because the share of lending is actually, the banks have is actually less. So we're going to need to count more on banks. They have a lot of capital, but how that all is going to play out is quite uncertain and, you know, should worry us a little bit. So on that up, we know. Over to Trent, maybe you have like, you know, with your Washington experience, maybe bring in sort of the regulation, the regulators view, other pockets that are... Yeah, I have an interesting perspective, having been on both sides of the football, to use an American phrase, having been in capital markets, trading leverage loans and CLOs, and then working on policy related to it. And I think that I agree with a lot of what Till said about the resiliency of the banking system, obviously a lot stronger, a lot more capital. They're dissuaded from doing what I call being in the storage business of holding a lot of super senior or mezzanine or even loans outright. They're rightfully should be in the moving business and I think a moving risk into pockets where it's desired. I think putting that systemic lens on it, I have to think about sources and uses. So where are funds going? Are those channels durable? Can they, do they have strong hands to be able to support losses in the event of a shock? And then the second thing is what's the velocity? Because if you think about the history of crises, there's always a maturity transformation element, there's always a leverage element, those two things come together and create explosive panics effectively. And so if we think about, let's just talk about channels, a lot of these different, particularly about syndicated loans, they are moving into private funds, they are moving into CLO structures. And as we saw in the last crisis, CLOs were one of the only vehicles that started with a C and ended with an O that were actually performing reasonably well on credit, not on liquidity, but on a credit basis. So to the extent that AAA, AA type bond holders were made whole through the cycle, they were made whole. There were liquidity disconnects in terms of price action of those traded notes, but predominantly these are term vehicles, meaning that they are match funded in terms of the note duration and the underlying loan duration. They don't have market value triggers like we saw with ABCP or SIDs or other kinds of animal prices that really were accelerants of force selling and of fire sale type behavior. So that's one important thing to note. The other is is that the predominant owners of those CLO type structures tend to be both private funds that are private equity type holders at the subordinate level and at the senior level there's insurance companies, there's pension funds. So these are long duration type holders that are not subject to redemptions at a day's notice. These are folks who are interested in long horizon type investment. So from that perspective, that from a systemic perspective, that makes me feel a lot better that there aren't those types of triggers. That said, I am concerned about some of the covelite issues with respect to just lightening covenants all over the place. That's been something that has really just been a fact of reaching for yield and allowing more, if you think about it as letting people into the party, you know, it's like letting the rowdy people kind of come into the party that could really disrupt everything. Going back to the old thing about the punch bowl and policy. So I think that's a key area of concern. The other area of concern, and I spent a lot of time working on this in Washington, is around mutual funds and the retail sector. And the fact is, is having retail investors who have access and treat leveraged loan type funds almost as a depository type investment, that's concerning to me. Because I think that that's something where we're likely to see a similar kind of a run event as we saw in money market funds going back to 2008. So I mean, to some degree like you both agreeing the risks are sort of contained and then of course we like wind back a little bit and before the crisis the risks were also there but maybe not well appreciated and well seen. Do you think like from a regulation perspective regulators have a have a good sense of where the pockets of risk are, these new things cover, I mean we after 2008 we all of a sudden discovered that didn't really have that map where the risk went. A simple form PF doesn't tell you very much. But I'll just say that, like when we think about the SEC and hedge fund exposures and the funds that invest in these types of investment, it just doesn't tell you very much as a supervisor as a regulator. I do think that there is a need for more and not self-disclosed but more supervisory information and regulatory information about the types of activities, the types of different leverage constraints or if there are no constraints, market value triggers all of these different things just to even understand where the bodies may be buried because as we saw in 2008 there was just a complete blindness to a whole vast array of of securitization and secured funding which felt like it was in strong hands but dissipated immediately. Yeah, so just I completely agree with it. So the regulators have without question a lot better hand law and risk and knowledge about risk in the banks. It's not obvious to me that they know any more outside the bank system. And because market-based finance has grown more than the banks, they know more about the treating part. So maybe let me ask the last round of question and we open it up so you can prepare for questions. The current moment if you look sort of broadly across asset markets and there are many people here in the room who have worked on asset pricing, on financial cycles, on risk sentiment and risk appetite, it would seem like if you look at stock market valuation if you look at the lending market, the covenant light issuance it would like seem that we are in many respects at like peak risk level. Would you agree with that statement and then where do we go from? Is this just going to be the soft lending scenario that everyone... So I said something I said something like maybe two or three years ago to some clients in the credit space about we're on the 11th inning of this credit cycle that was three years ago. I mean I'm blown away having been in the credit markets for 25 plus years at how extended the cycle has been. Every time I think that we're about ready to have a tipping point as far as defaults or recidivism rates, whether it's in consumer or mortgage debt or other corporate debt, the music just keeps playing. So I am concerned that we're kind of on that precipice. That said, I think that I'm very heartened by a lot of the work that was put in place post-DFA, post-crisis around the resiliency, the banking system and in terms of being able to absorb losses because I do think that the median outcome is to come out to a place where it's a normal credit cycle. There was going to be an increase in defaults and losses. There will be some tightening of standards but it's not going to be the 50 or 100-year flood that we saw away. So I don't have any, I completely agree with you sort of outlook about probability and so on and it is remarkable next month we're going to be, it will now be the longest post-war expansion of the way of experience. I want to pick up on something that you mentioned earlier about CLOs because what I'm more worried about is what we think might happen if there is a shock. So what are the behaviors of borrowers? You mentioned rightly that CLOs actually perform very well and so it's no accident that that's growing very well because it worked very well. Last time everything else went up to hell, so let's grow this. Auto, similar auto actually did very well during the crisis. Used car prices actually exited the crisis higher than they entered and auto finance has grown a lot. This is not entirely unlike a subprime lending early in the 2000s. So early in the 2000s people made the observation that I don't know from how many of you remember ALT-A. So ALT-A is a little bit better, a little bit better than subprime. You used to call it scratch and done. That's exactly. So that class performed worse in the sense of credit losses than subprime. What do you do with that information? You pile into subprime obviously and by doing so you change the nature of the market, you change the borrower profile and you likely change the behavior conditional on a shock next time. So it's a kind of lucrous critique I think to this market behavior with 85% covenant light for leverage finance that we haven't ever leveraged on since we haven't ever seen. With this enormous growth of CLOs conditional on a shock I think it's going to turn out very different than we have based all of our credit decisions on from from past. I think the one distinction is that the part that was mentioned yesterday and the piece about thinking rethinking the subprime crisis is that the contagion effect so to the extent that you had subprime delinquencies upticking early spring of late winter of 07 and then having this knock-on effect to all day to prime to conform in different MSAs and zip codes that was a big distinction of a tipping point of like okay now everyone is sort of contaminated right to the extent that its home prices its regional and its affecting different prices. I don't see the same way of this playing out in terms of secured senior secured debt to junk rated borrowers where you know is that going to cause a plummet in you know office furniture prices or something. I mean maybe that does play out that way but I it feels more contained in terms of the type of contagion that can that can present itself but I agree that we don't know enough yet and I think that the the call the continual call for the OCC and Fed and others to get more information about this market segment is important to have. I mean just to be clear I don't actually think that the next round it could be any like the previous one. I think we probably will learn more by looking at the prior two recessions from the milder the one in 2001 and the 91 recessions. I agree with you. And last question from my side with a decade now of ultra low interest rates half of the room works on the last round. We have it would seem like when we look back at this in 10 years and think like yes but we had a decade of super easy financing conditions very low interest rates wouldn't it be surprising if this haven't built up like what is it where is what are we missing. I think I think it's funny because I and I experience this in some of my my work now is there's a whole generation of you think about interest rates trading treasury swaps whole generation of traders and risk managers that it's like the land the lotus eaters they've only known low volatility you know they've only known complete messaging by the fed the dot plots like they don't remember the old days by us old guys are like green spans briefcase how big is it what's it gonna be and and there's an important I remember talking to Paul Volcker about this of course his mind was like do like a magic eight ball and just you know hey maybe we go up maybe we go down just to insert a little volatility uncertainty and the point being that there can't be this continued reliance on the Fed just to sort of be a put to the markets or to be so clear and transparent that it's already automatically telegraphed three or four or six steps ahead as far as that path dependency I do worry about the inability of not just market participants but investors and bank you know credit officers of not experiencing that kind of uncertainty and having that telegraphed completely and having that certitude in what they're underwriting and what they're doing in terms of their origination behavior I worry that that's a a long lasting effect that said I don't know how you change it because what we came out of you know the actions that were taken under QE and other measures had to be taken and so I mean I not to be King Solomon but it's like I both admire the actions that were taken but lament the fact that it is going to leave these long term effects on market participants and others of having this kind of guaranteed sense of here's where interest rates are going to be and they're not going to move that much any transport about institutional memory is worth is worth sort of pushing on most contexts were born after the financial crisis and so they're off happily you know building new credit models with new sources of data based on behavior that's largely post crisis because those new data sources that were are essentially post-crisis phenomena and their optimism about being able to suck out exactly the right credit credit behavior is kind of remarkable so I'm curious to see how to pan out once once we're you know once a slightly harsher reality sunset okay um yes please yeah hi rob duckard I'm a board member and uh on behalf of the board let me thank everybody for being here and the staff for a great job for putting this together my professional career began working for Henry Wallach at the federal reserve in 1971 when we the uh we broke from the dollar so my institutional memory is I'm 74 so that's that's both a burden and and maybe a blessing I don't know but one of the things that was interesting about yesterday was the focus on historic events and then how they translated into that the 29 crash so the housing bubble that we saw in the 20s was really a result of the world war one's suppression of housing construction and then the surge that occurred afterward and then that echoed through and created conditions that contributed to the 29 crash my question is in 2006 foreign exchange denominated loans by Chinese borrowers amounted to about 200 250 billionth it now at the end of 2008 excuse me 2018 it was about a little over 2 trillion so it increased 10 fold from 2006 June 2006 as you remember was the last 17 rate hikes the Fed gave that last rate hike interesting thing about that 2006 the default rates had already started because sub-private lending had already started and when you start lending that community you're going to get more defaults and default rate was rising the housing uh stock index had been falling for six months and the Fed did the last hike seven months later Bear Stearns declared two hedge funds gated because they had too much junk and within soon after that in 2007 we learned that uh that the rest of the world had about a trillion dollars of this stuff on their balance sheets and we were frozen I mean this was at the Jackson Hole conference in September 2001 that's all we talked about nationalizing Fannie Mae and Freddie Mac which we had to do within within a month fed then cut rates 75 basis points over 45 days okay um how much of the current credit corporate credit that you're talking about is actually loans to Chinese borrowers because they have they currently have the highest credit to GDP ratio in the world it is higher than Japan's in 1990 higher than higher than every crash we've had so far and it's falling maybe looking sort of at the international environment with China and maybe you see other risks yes I mean I'll say I mean from from the perspective of what I was talking about the syndicated loan market it's it's the LSTA 100 it's the it's the it's the US-based companies to the extent though that there is there is definite Chinese investment in CLOs and into structured vehicles that invest in those loans so this is part of the secondary tertiary effect of if they're in trouble and coincide with our credit troubles that bid right to buy that paper phase and and that creates a collapse in that that type of pricing and liquidity in that market so they are a pretty strong bid within that subordinate mezzanine kind of space along with the the Japanese as well so I'm sure answers I don't know how much of the US leper can actually with the borrowers of Chinese I was actually thinking more than the lenders investors are there are a lot of foreign investors in that market so on the other side where the Chinese you know are quite active I don't know how it nets out but you know that that has an interesting political element about whether or not they will hold their US dollar not just dollar denominated by the US dollar to US company lending for economic reasons or other yeah it's just I was wondering if I could get you to talk a little bit thank you I was wondering if I could get you to talk a little bit about changes in financial regulation over the last couple of years and I just I feel like on one hand that it would be really hard to believe that Dodd Frank kind of nailed it and also three so of course we need refinements but you here kind of you see media reports kind of suggesting that oh no there are terrible things happening you know we are weakened the stress tests and important I mean I know we've changed them in some ways I think there was some guidance around leverage loans that then got rolled back last couple years and I just can't tell whether this is you know significant I mean that you'll read about it as if it's a terrible thing and they're undoing important financial regulation I mean it could just be good refinements or it could be just not not very consequential so I was just wondering if you'd comment on that yeah so I think one thing I'll I mean I think we got a lot of things right I'll start off with that but I do think on the tweaking side of things like like I think with the Volcker rule that was one where at least I'll say from my end there was a lot of contentious debate within within the policy making sphere about really trying to it because it's really about trying to define the intent of a dealer of an intermediary of saying are they taking risk for themselves or are they facilitating liquidity and honestly like really understanding that at a very kind of tactical numerical level is really impossible particularly in the markets we're talking about whether it's loans or high yield instruments so I think the work on trying to really refine that and better treat that is actually really worthwhile at helping to facilitate liquidity one of the things that I have not as a champion of FSOC that I have not been thrilled with is how that's been really used as a deregulatory body so it's gone away from being an early warning system to being more about how can we you know sort of undo some of these different constraints that DFA had led to that that's that's worrisome for me I think and especially with the rise of opera I'm very concerned about operational risk particularly in automated markets I'm concerned about cyber security that form had provided a really good a place where information could be shared around those types of issues and I worry that that's all being kind of left to the side now so yeah no I think that's to the FSOC point I think it's really important actually as a as an entity that monitors stuff sort of that's supposed to it's gonna as supposed to as monitor stuff and all of that falls through cracks otherwise and to take that away I think it's really dangerous I'm a little I'm a little sort of a little less fussed about all the regulatory rollback so so for instance on stress testing you know look the US has had when you compare it to other regimes the european regimes for instance has had a much harsher and more thorough stress testing program but also includes a lot of qualitative stuff so we'll talk often about the qualitative the qualitative is arguably more important especially in sort of financial peacetime if you will natural wartime and crisis it really matters that quantitative stuff and peacetime it's not so obvious and if it does that means we got it wrong the first time and here there's been not just more quantity quantum capital but the risk management practices that banks have improved enormously and to roll you know to sort of ease off on that doesn't seem silly to me supervisory resources are scarce and the Fed knows that and so they're concentrating it progressively more and more they're really large shops and paying less attention to the small events that seem very very sensible so I'm again we could we could go on to some of the other parts of the regulatory easing but on the stress testing I'm not really all that fussed about how about the changes Rudy from the Swiss Finance Institute I studied my research a bit the leveraged loan market in 2007 2008 and one thing that really shocked me there is for these very large LBO deals you had the leader rangers signed signing commitment letters and then it took for half a year a year until the deal was actually consummated and they could syndicate the deal or issue the high yield bonds and you saw that like 250 billion or so they were actually hung at one point in time and were stuck on the balance sheets of the banks and it was really bad and now we read about the LBO market you said till that it's only 25 billion but I wondered whether the process has changed whether risk commutes of banks of the elite arrangers because it's kind of small group whether they are more cautious whether there's more precindication whether something has changed to mitigate these risks a little bit well so I mean the short answer is a lot of the buy boxes had shrunk dramatically so I think the concern now is that after having shrunk quite a bit with that experience in mind things are loosening so things are loosening and things are loosening particularly in the outside of banks so yes the bankers still are fairly risk averse but the leverage finance market is you know is increasingly being accommodated by non banks so I'm you know I remain not terribly worried about leveraged lending risk in banks per se I'm more worried about stop blowing up outside the banks than non bank finance pulling back and then we have to count more on banks to then step in and play their play their role of you know sort of credit intermediaries of second to last resort I think there's been some big significance tactically there's been significant changes about warehouse financing which is what you're describing where the the the sponsors the non bank sponsors are taking a lot more risk so the banks have traditionally when I was doing these deals the dealer would pretty much take all the risk maybe we get 10% risk share to the sponsor now it's predominantly borne by the sponsors the timelines are very tight if the deals don't close the the warehouse is extinguished and assets are sold of course they're selling into a rising market so you can argue that's you know sort of that verse but I do think that that dynamic has changed a lot and there's certainly on the point about risk you have to remember that we're coming from a place that prior to 08 the front office led everything if you were if you were the dealer or the trader you told the risk what they were going to do it was very inverted and I think that in the post crisis era rightfully so risk management overall has taken much more of a leadership role and put a lot harder constraints in place around value at risk around balance sheet usage and about other types of risk limits that no one really debates anymore there's there's not a lot of pushback from the business end no I just wanted to bring it back to the consumer credit market for a second to find a benesie university of Pittsburgh and fill up on your point on fintech that has grown massively after the crisis in a low interest rate environments and a growing economy and there has been some work on fintech consumer lending suggesting that the performance of loans you know two similar borrowers has been better by in fintech loans than it has for conventional lenders and it remind me a little bit of you know MBSs and CVSs on real estate when we hadn't seen a large reduction in home prices and they really didn't know how to value and monitor a risk of a large downturn on the housing market now fintech companies are not my companies but they get a lot of investment and resources from traditional banks so I just want to get your perspective on the fintech market from a systemic perspective and the spillover is potentially on you know conventional banks and other you know financial investors so I don't take a no-normous amount of comfort the observation that their loan performance you know controlling for risk characteristics is better now because it reminds me again of this story of you know subprime performance better than all day and so everybody piles into that um the performance is you know we'll have to see how how would it how they pan out in in a in a recession and at least my interaction with the fintech community has been I'm surprised at the you're you're point about you know first line second line risk management versus business the absence of appreciation for and knowledge about risk governance and risk management as a role in the in the credit process is a little is a little scary now there's not a lot of it right so the fintech sector isn't that big yet so if it if it goes really south there it's not obvious to me that that's going to matter enormously but but I don't I you know I'm not sure I feel that'll that that should make me uh you know sleep easy at night yeah no I agree with that I think it's a small segment right so it's the extent that there's systemic implications I think the systemic implications have more to do with potential operational risk if there's scalability so if the technology is adopted by a bank and there are proper by the model validation risk controls around processes and procedures whether it's origination or retaining risk that's a concern uh that could become systemic but I think um overall I'm very I'm very happy to see a lot of different fintech innovation I think that it's sort of fostered particularly to the extent that there's greater access of finance to non-traditional participants in the in the economy or the underbanked I think those are good things um but I I think that the absence of of of risk-mindedness is you think about think about mortgage origination right to the GSEs they don't have they don't really worry about the credit box because they just take what the credit box from Fannie Freddie isn't conformed to that so so that that's maybe not as concerning but once that starts to migrate into the all-day dented crime you know alternative type borrower that could be concerning no thank you Kathleen Steffen syndrome is trustee for the AXA equitable mutual funds um so you talked about till about the accelerator to what extent do you find it as a silver lining to this narrative the fact that a lot of the leverage corporate leverage has been used to buy back stocks or pay out dividends does this ring fence in a way the real economy in case there is a bubble burst in the sense that we haven't seen a direct linkage to a major acceleration in investment spending in the real economy so I'm not sure I understood you right I think what you might be viewing as a feature of you as a bug so um if I if I borrow if I use leverage finance to buy back shares I have a lower shock cushion than I did before so I should be less well prepared for a better prepared so unless I misunderstood you the phenomena that you described is the is a very dark lining on the cloud as opposed to a silver one I'm looking at it from a macro standpoint that if you do have this you might essentially the the knock-on effect might be less direct if you will to the real economy yeah again that's not obvious to me um in fact I would get a little harder on this but I think maybe actually exactly the opposite right so if if a corporation is now more highly levered than they were before uh and they experience a shock they're gonna they're gonna be they will have to be more risk-averse because they are well they're they're a riskier entity because they have more leverage if the cost of borrowing because they might have borrowed this very low rate is low they can probably withstand that but reasonably well I mean this you know there's a lot of moving parts here but on its own it's not obvious to me I don't I don't see why I should be comforted by that and I don't see how the financial accelerator would be huge are you guys concerned about a credit crack are you guys concerned about a credit crisis in China and other kind of satellite Asian satellites of China I mean I am I mean I have been for some time I think so this is the same kind of amount of astonishment I've had about an extension of our own cycle sort of can be extended to China I mean I've been kind of impressed in some ways I guess or mystified at how the every time there seems to be some kind of kindling that forms around defaults for cynicism or credit problems you just seem to wipe away in terms of government support and and and other types of measures so I do worry about it I don't I don't know exactly what we can do about it quite frankly and so my policy making hat goes from the things I can worry about to then the what I can actually do about things that I worry about and that's one of those things that maybe it's like a bogeyman it's out there but well the one thing I could which is being done is to include a China meltdown in a stress scenario and that banks are doing and in fact it's been an explosive part of the PRA's stress scenario for a while is you know assume that the trend Chinese credit is melting down what are you going to do thank you similar question on the international side not China but BIS has recently been documenting US dollar lending from the euro dollar market into emerging countries say Brazil Argentina much of the emerging world has started tapping into the corporate debt markets and and dollar markets so US based offshore lending it doesn't involve necessarily US institutions but is in in a dollar in a dollar denominated setting so that from from from the perspective of the functional functional regulators perspective that falls into the same category but now the same category of lending of repo markets that was sort of intermediate what we call shadow banking maybe in the pre-crisis environment but now it's not happening with the US institutions involvement but it's happening in an emerging market setting with British banks or British actors involving those those types of credit cycles so I'm wondering now from a US perspective how do you view that kind of development is it is it on the radar for how do you intermediate with the euro dollar market from a regular perspective since that will in some way come to the banking sector at some point because from what you said from the stress test perspective the ability of the US banking system to extend loans into Europe or other places is a critical factor to immediate any crisis of liquidity in those markets potentially if we don't want to rely on the Fed to use their swap lines yeah I just one comment overall on the international post-crisis that's really important and I saw this live or I saw it with housing finance reform there's such a more tightly linked communication channel between the United States the UK the Europeans and then emerging market central bankers and so to the extent that you have different channels whether it's through DCB systemic risk committees or the FCA and their sponsorship of different systemic risk efforts there is a lot more coordination so there's a lot more conversation that happens I think that the the core of what I always want to see is the data so you know and that's the part that's harder I think to share around given those kinds of constraints so when we do ask about bilateral repo or unsecured financing and what that may look like and trying to understand the linkages and chains of transmission that's something we always wanted to try to fill in as a map not just for the United States but four locations of FBOs operating in the United States but also heavily relied upon counterparts overseas and I there's there's there's definitely a lot more that we could do there I think Iosco has tried to do that from a dealer security side but but there's and there's definitely a lot more of a need for that because frankly the replication of the same kind of fire runs is as a fire you know for selling as likely to happen in these kinds of situations let me sort of ask a bigger picture question up you know we I'm in Minsk at this sentence that stability is destabilizing the idea being that like it's in the it's in the peace it's in the quiet times there is still called them in peace time when we all convince ourselves that things are actually under control regulators are talking to each other risk management practices have improved that's when somewhere the the sort of the the the the building gets the from the members of the building get weakened someone is digging right now under our feet trying to exploit that what are we what are we question what are we missing something is is are we really here saying like this is the post crisis decade people are so scarred stuff from the decade they haven't done any bad things so are there what's what are the risks we're not having on the horizon is it that interest rates could be higher again at some point is it what is it that what's what's missing I think I think and I alluded to this earlier it's a great point and frankly they used to call my office and my staff the the doomsday or say doomsday sayers of treasurer because we were the most glum people thinking about the worst things you know that could happen but I think that one of the most under under studied or or recognized risks is around operational and cyber and the reason why is because it's not understood you talked to most leaders of companies of government agencies of central banks they just have really no grasp of it and meanwhile it's a truly destabilizing type of exposure and vulnerability it's not one that fits within our defined classical models of economic theory of self-interest of of of booms and busts and so I think it's something that we need to have more of a spotlight on in terms of what is infrastructural integrity whether it's in automated trading markets or it's within mainframes that are supporting credit and lending and other bank operations because it's something where there are as we saw with bank Bangladesh and the theft of almost a billion dollars from the new york fed there are highly organized nation state sponsors that not just want to get money they want to disrupt the american economy they want to disrupt the developed economies so if i'm if i'm really uh that's something that keeps me up at night tell us is it the european banks that keep you up at night no i mean i took the words right out of my mouth you know i was good if you could say the quick that if i know if i knew i wouldn't be here i'd know what to short um and i'd be shorting it but i don't know how to short that i know and that really worries me about peace uh in the hard business route on the 10th and it's like right on the 10th anniversary of Lehman brothers where i basically the colleagues speculate you know what might be the trigger for the financial crisis and i actually think it would be the cyber event and one of the reasons i worry especially about a cyber event is because it's not obvious to a central bank would do uh the countermeasures are really not obvious we are just you know we haven't seen anything like this it's something that really we don't know much about um and what do you have in mind as a cyber defense is like mr robot type the data you raise you know my favorite nightmare scenario is a data integrity so one day you wake up and you realize oh you know the danger that i have in my system i think it's quite right but i don't know when it became wrong and so as that you know leaks out you don't have the source of truth anymore and there's a there's a lack of confidence so that's one and whether or not that spills over into the into the central bank right so does the central bank uh know when is is the central bank data uh corrupted and even if they say that it isn't should we believe yeah we used to run exercises around similar data corruption also um effectively theft right so large-scale transfer of monies um leading to a bank that can't settle at end of day and if they can't settle at end of day against their counter parties creating a liquidity crisis so a lot of the exercises we would do is around well what's the communication channel like nobody even knew who to talk to it's like the the the the the chief information officer does he talk to the treasurer does he talk to the the liquidity repo debt like and when does it go to the ceo to communicate to the fed or when should the like all those different things which frankly there's a lot more work that needs to be done i mean to be sure it's not like banks are not i'm not cool what's about this this has been the number one risk in the for cro's five six years right it is uh and it's not moving away from i think for all for all i agree with that but i think for all the the the academics in the room this is an area of study i mean i think there's weight i'll say i think there's way too much of looking at the pterodactyls that might attack us you know i mean the abcp is not coming back folks you know it's just not going to represent it that the crisis isn't going to manifest itself the same way so i think this is a frontier um i'll put it out as an open bid i'd love to work on some pieces like that so thanks so much thank you thank you