1 00:00:10,680 --> 00:00:14,319 Speaker 1: Hello, and welcome to a special episode of the Odd 2 00:00:14,360 --> 00:00:18,560 Speaker 1: Thoughts podcast. I'm Tracy Alloway, I'm Joe Wisenthal. So this 3 00:00:18,640 --> 00:00:20,919 Speaker 1: is a live recording that we are doing at the 4 00:00:20,960 --> 00:00:24,279 Speaker 1: Credit Market Structure Alliance Conference. We are going to be 5 00:00:24,320 --> 00:00:28,760 Speaker 1: talking about one of the thorniest, most controversial topics in 6 00:00:29,040 --> 00:00:34,159 Speaker 1: financial markets. And it's not compensation, it's liquidity, right, and 7 00:00:34,280 --> 00:00:36,960 Speaker 1: so obviously, you know, it's kind of a wild year 8 00:00:37,120 --> 00:00:41,199 Speaker 1: for markets overall. In two I guess markets have been 9 00:00:41,240 --> 00:00:44,640 Speaker 1: a little bit more constructive calm so far to start, 10 00:00:46,040 --> 00:00:48,479 Speaker 1: but like I mean, I think it's still pretty clear 11 00:00:48,520 --> 00:00:50,879 Speaker 1: that people are like anxious about like what are what 12 00:00:50,960 --> 00:00:53,920 Speaker 1: are the various risks lurking out there, particularly like coming 13 00:00:53,920 --> 00:00:57,240 Speaker 1: off such a big pricing of interest rates and such 14 00:00:57,240 --> 00:01:00,760 Speaker 1: an uncertain macro environment, That's exactly. And we have had 15 00:01:00,880 --> 00:01:05,240 Speaker 1: instances where liquidity risk has reared its head recently, notably 16 00:01:05,600 --> 00:01:08,240 Speaker 1: with some real estate funds based in the UK that 17 00:01:08,319 --> 00:01:12,440 Speaker 1: had to suspend redemptions that prompted a well known question 18 00:01:12,480 --> 00:01:14,720 Speaker 1: of whether or not we should actually have these liquid 19 00:01:14,760 --> 00:01:17,200 Speaker 1: assets in a liquid wrapper. So we are going to 20 00:01:17,280 --> 00:01:20,680 Speaker 1: be delving into all of that with really the perfect guest. 21 00:01:20,880 --> 00:01:23,240 Speaker 1: We are going to be speaking with Fabio natal Lucci. 22 00:01:23,400 --> 00:01:26,360 Speaker 1: He is the Deputy Director of the Monetary and Capital 23 00:01:26,400 --> 00:01:30,640 Speaker 1: Markets Department at the International Monetary Fund. He's responsible for 24 00:01:30,680 --> 00:01:33,440 Speaker 1: the Global Financial Stability Report that the i m F 25 00:01:33,520 --> 00:01:36,959 Speaker 1: puts out every year. Previously at the Fed and the Treasury. 26 00:01:37,040 --> 00:01:39,479 Speaker 1: So really the perfect guest, Fabio, Thank you so much 27 00:01:39,480 --> 00:01:44,240 Speaker 1: for coming on. Thanks. Um. So, maybe a very simple question. 28 00:01:44,440 --> 00:01:46,880 Speaker 1: It seems like a simple question just to begin with, 29 00:01:47,360 --> 00:01:52,360 Speaker 1: but it never is. What is liquidity? So liquidity and 30 00:01:52,520 --> 00:01:54,960 Speaker 1: I think we're talking about market liquid here, not liquidly 31 00:01:55,000 --> 00:01:58,400 Speaker 1: on the balancial banks, but essentially is the ability to 32 00:01:58,920 --> 00:02:03,080 Speaker 1: uh liquid by in a position at market prices they know, 33 00:02:03,280 --> 00:02:07,520 Speaker 1: at a price that doesn't move or dual ow prices significantly, 34 00:02:07,560 --> 00:02:09,919 Speaker 1: so you can do it quickly, you can do without 35 00:02:10,000 --> 00:02:13,200 Speaker 1: much market impact, so you can essentially refi a position 36 00:02:13,240 --> 00:02:16,200 Speaker 1: without having a major impact on the overall market. So 37 00:02:16,919 --> 00:02:20,160 Speaker 1: you know, I mentioned that in the interio was kind 38 00:02:20,160 --> 00:02:23,880 Speaker 1: of a wild year for multiple asset classes, etcetera. Why 39 00:02:23,919 --> 00:02:27,760 Speaker 1: and large though not too much broke, right, I mean 40 00:02:27,800 --> 00:02:30,320 Speaker 1: I think like so you have the looking back, it 41 00:02:30,360 --> 00:02:32,400 Speaker 1: feels like it could have been worse. So this is 42 00:02:32,440 --> 00:02:34,480 Speaker 1: the big question, right, So if you work in financials 43 00:02:34,560 --> 00:02:36,960 Speaker 1: a bility now and you say, okay, if someone told 44 00:02:36,960 --> 00:02:39,200 Speaker 1: you a year ago that the Federals are would raise 45 00:02:39,360 --> 00:02:44,080 Speaker 1: interest rate four under fifty business points under business points, Uh, 46 00:02:44,440 --> 00:02:46,320 Speaker 1: do you think he would have worked smoothly or what 47 00:02:46,400 --> 00:02:49,040 Speaker 1: would have broke? And I think the answer you would 48 00:02:49,080 --> 00:02:52,720 Speaker 1: be looking for praising things that they were something didn't 49 00:02:52,760 --> 00:02:56,640 Speaker 1: work right now. There were some instances, I think so 50 00:02:56,760 --> 00:03:00,360 Speaker 1: the pension l D. I think in the okay, it 51 00:03:00,400 --> 00:03:06,960 Speaker 1: was a good example of liquidity problem interacting with leverage problem. Right, 52 00:03:07,000 --> 00:03:10,240 Speaker 1: so that's a combinational to vulnerabilities that amplify each other. 53 00:03:11,360 --> 00:03:13,880 Speaker 1: Of course, the trigger of the shock was very unique. 54 00:03:13,919 --> 00:03:17,519 Speaker 1: It was a physical policy shock that it's kind of 55 00:03:17,680 --> 00:03:20,200 Speaker 1: US incretic if you want. There was some other example 56 00:03:20,280 --> 00:03:24,320 Speaker 1: like a Korean as ber securities market, but generally speaking, 57 00:03:24,360 --> 00:03:26,480 Speaker 1: particularly focus in the US, I think things have gone 58 00:03:27,200 --> 00:03:29,600 Speaker 1: pretty smoothly, which if you work on the other side 59 00:03:29,639 --> 00:03:31,560 Speaker 1: you need to worry about risk. Then the question is 60 00:03:31,600 --> 00:03:36,240 Speaker 1: like did I miss something? All the system is really 61 00:03:36,240 --> 00:03:39,920 Speaker 1: more resilient, and I should feel comfortable, and it's always uncomfortable. 62 00:03:40,040 --> 00:03:43,480 Speaker 1: Feel comfortable. So well, this is something that I always 63 00:03:43,480 --> 00:03:46,640 Speaker 1: like to ask regulators, which is so much of so 64 00:03:46,720 --> 00:03:48,920 Speaker 1: much of the financial stability risk seems to be in 65 00:03:48,960 --> 00:03:51,920 Speaker 1: things that we don't see coming. So given that we've 66 00:03:51,920 --> 00:03:54,920 Speaker 1: been talking about liquidity risk for you know, probably eight 67 00:03:55,000 --> 00:03:57,360 Speaker 1: or ten years at this point, like should we be 68 00:03:57,480 --> 00:04:00,240 Speaker 1: looking at something else or do you think the problem 69 00:04:00,320 --> 00:04:02,720 Speaker 1: has largely been solved? So the way if I'm at 70 00:04:02,760 --> 00:04:04,880 Speaker 1: for a second thing, how we think about financial stability 71 00:04:04,880 --> 00:04:07,200 Speaker 1: of the fund right, so we don't try to forecast 72 00:04:07,280 --> 00:04:09,000 Speaker 1: what the next shock could be. So I think I 73 00:04:09,000 --> 00:04:11,720 Speaker 1: would admiss all of them. Right if you think about Cowvid, 74 00:04:11,880 --> 00:04:14,360 Speaker 1: that's not what probably wasn't my top lists the war, 75 00:04:14,880 --> 00:04:16,359 Speaker 1: So I don't want to be in that business. I 76 00:04:16,360 --> 00:04:18,480 Speaker 1: think what we can do and we try to do, 77 00:04:18,960 --> 00:04:21,120 Speaker 1: is to figure out what are the vulnerabilities. I think 78 00:04:21,160 --> 00:04:23,680 Speaker 1: of vulnerability is an amplifier that there's any shock that 79 00:04:23,800 --> 00:04:26,040 Speaker 1: hit whatever that is, and then there are fragilities in 80 00:04:26,080 --> 00:04:28,560 Speaker 1: the financial system and make the shock bigger. And so 81 00:04:28,680 --> 00:04:30,760 Speaker 1: we have some sort of like metrics where we look 82 00:04:30,760 --> 00:04:36,120 Speaker 1: at different sectors, so the sovereign debt for example, household corporations, banks, 83 00:04:36,160 --> 00:04:38,839 Speaker 1: and then when we call non bank financial institutions, and 84 00:04:38,839 --> 00:04:41,960 Speaker 1: then we look at different vulnerabilities. So liquidly it's one 85 00:04:42,000 --> 00:04:45,160 Speaker 1: of them, or lack of liquidity leverage. Financial leverage is 86 00:04:45,200 --> 00:04:49,360 Speaker 1: another one. Effects exposure or interconnections between the system and 87 00:04:49,360 --> 00:04:52,480 Speaker 1: then we try to fill the metrics based on the 88 00:04:52,560 --> 00:04:55,039 Speaker 1: data we have and we do this for the twenty 89 00:04:55,160 --> 00:04:58,040 Speaker 1: nine time important countries and we track them over time. 90 00:04:58,640 --> 00:05:01,520 Speaker 1: So liquidit it's one of them. Again, there were example 91 00:05:01,640 --> 00:05:04,160 Speaker 1: like the Dash for cash in was a good example 92 00:05:04,200 --> 00:05:07,080 Speaker 1: and involved the specific entity in the non bank financial 93 00:05:07,080 --> 00:05:10,120 Speaker 1: intermediation sector. There was the l d I in the UK. 94 00:05:10,240 --> 00:05:13,440 Speaker 1: It's a combination of liquidity and leverage. There was Archegos 95 00:05:13,560 --> 00:05:17,400 Speaker 1: is another example. I think more of financial leverage perhaps interconnectness. 96 00:05:17,440 --> 00:05:20,599 Speaker 1: So those are the things we're looking at. But again, um, 97 00:05:20,839 --> 00:05:23,359 Speaker 1: the thing to me the biggest puzzle now is financial leverage. 98 00:05:23,360 --> 00:05:26,159 Speaker 1: There's a lot of talks of leverage position being unwound 99 00:05:26,200 --> 00:05:30,400 Speaker 1: and resolates more higher volatilitarizes, but you don't really see 100 00:05:30,440 --> 00:05:33,000 Speaker 1: the system breaking. So again it's see that because it's 101 00:05:33,040 --> 00:05:35,600 Speaker 1: been the financial egolators have done a great job for 102 00:05:35,839 --> 00:05:39,800 Speaker 1: financial crisis, or maybe we're missing something they're like, think 103 00:05:39,839 --> 00:05:41,680 Speaker 1: of the l d I in the UK. Maybe this 104 00:05:41,800 --> 00:05:44,160 Speaker 1: is like a tramore that it's under the surface and 105 00:05:44,640 --> 00:05:46,760 Speaker 1: we don't see it, but something else may break. That's 106 00:05:46,760 --> 00:05:49,119 Speaker 1: the biggest concern at this point, that we're missing something 107 00:05:49,120 --> 00:05:51,240 Speaker 1: and we're not looking the right place. So I do 108 00:05:51,320 --> 00:05:53,919 Speaker 1: think that, like at the start of two, if you 109 00:05:53,960 --> 00:05:55,480 Speaker 1: had sent to someone, Okay, the FED is going to 110 00:05:55,600 --> 00:05:59,159 Speaker 1: hike for your fifty basis points, and by and large 111 00:05:59,320 --> 00:06:01,000 Speaker 1: things would be would like I think that would be 112 00:06:01,000 --> 00:06:04,040 Speaker 1: surprising for a number of reasons. Everyone had become used 113 00:06:04,080 --> 00:06:09,160 Speaker 1: to zero de facto zero interest rate. It was dramatic 114 00:06:09,240 --> 00:06:13,800 Speaker 1: hiking by any standards. Let's start like, how would you 115 00:06:13,960 --> 00:06:18,599 Speaker 1: like to what degree would you say that the smoothness 116 00:06:18,640 --> 00:06:21,880 Speaker 1: of markets last year can be attributed to post grade 117 00:06:21,920 --> 00:06:26,240 Speaker 1: financial crisis reforms? So I think that's certainly an aspect 118 00:06:26,240 --> 00:06:29,600 Speaker 1: of that. Right, So the financial post financial crisis regulation, 119 00:06:30,320 --> 00:06:33,160 Speaker 1: in my view, most certainly made the system the core 120 00:06:33,200 --> 00:06:35,760 Speaker 1: of the systems. So the banking sector more rezilient, right, 121 00:06:35,839 --> 00:06:39,080 Speaker 1: the more liquidity, the more capital, the resolution plans a 122 00:06:39,120 --> 00:06:42,039 Speaker 1: bunch of feature that made like, if you want the 123 00:06:42,040 --> 00:06:45,160 Speaker 1: fortress of the financial system safer, there is can move 124 00:06:45,240 --> 00:06:47,359 Speaker 1: away from there. And they moved towards we called the 125 00:06:47,440 --> 00:06:49,680 Speaker 1: nba FI or non bank Financial Institution. I think of 126 00:06:49,720 --> 00:06:53,640 Speaker 1: that as hedge funds, investment funds, solving wealth fund, pension 127 00:06:53,640 --> 00:06:57,119 Speaker 1: insurance um and part of it, I think it's okay 128 00:06:57,160 --> 00:07:00,960 Speaker 1: because they have different risk profile, the different investment aizing, 129 00:07:01,080 --> 00:07:04,880 Speaker 1: different investment funding structure, and so part of it is fine. 130 00:07:04,920 --> 00:07:08,599 Speaker 1: The question is one whether we have visibility into this 131 00:07:08,680 --> 00:07:11,040 Speaker 1: corner of the financial system, right, So do I can 132 00:07:11,080 --> 00:07:13,280 Speaker 1: I actually assess the same way I would assess a bank, 133 00:07:13,320 --> 00:07:15,800 Speaker 1: And I think the answer is no, because there is 134 00:07:15,840 --> 00:07:17,840 Speaker 1: a number of data gaps that have to do with 135 00:07:18,120 --> 00:07:21,840 Speaker 1: this institution. Whether this has to do with leverage for example, 136 00:07:21,880 --> 00:07:23,840 Speaker 1: perhaps that's the most difficult one, or even liquid it. 137 00:07:24,440 --> 00:07:28,320 Speaker 1: The other question is are they systemic enough? So suppose 138 00:07:28,360 --> 00:07:31,000 Speaker 1: something goes wrong and the shock gets absorbed by that 139 00:07:31,200 --> 00:07:34,559 Speaker 1: entity in the non bank financial sector, maybe it's okay 140 00:07:34,600 --> 00:07:37,200 Speaker 1: because it's not systemic. You can absorb it doesn't create 141 00:07:37,200 --> 00:07:42,440 Speaker 1: a financial stability even f X, Yeah, in some sense. 142 00:07:42,760 --> 00:07:44,840 Speaker 1: And then the other part is like, is there a 143 00:07:44,920 --> 00:07:47,320 Speaker 1: feedback though into the banking sector right that we have 144 00:07:47,360 --> 00:07:50,000 Speaker 1: no considered right? So Archegos. I think the example there 145 00:07:50,160 --> 00:07:53,600 Speaker 1: was yes that the entity per se perhaps was not systemic, 146 00:07:53,680 --> 00:07:55,560 Speaker 1: but there was so much feedback into the back door 147 00:07:55,600 --> 00:07:58,440 Speaker 1: of the banking sector to prom brokerage for example. Right, 148 00:07:58,520 --> 00:08:01,480 Speaker 1: so that that's kind of with think about it, um, 149 00:08:01,600 --> 00:08:05,640 Speaker 1: I think the reform there are some unfinished business in 150 00:08:05,680 --> 00:08:10,000 Speaker 1: the nonbank financial intermediation performed agenda. Some of it it's 151 00:08:10,080 --> 00:08:12,640 Speaker 1: holds and not being called by their form agenda somewhere 152 00:08:12,640 --> 00:08:16,480 Speaker 1: that to implementation. UM I don't want to just say 153 00:08:16,520 --> 00:08:18,800 Speaker 1: that it's all bad though, and their advantaging positive of 154 00:08:18,920 --> 00:08:21,560 Speaker 1: activity and risk moving to the non bank financial intermediation 155 00:08:21,640 --> 00:08:26,000 Speaker 1: right there again different risk profile, different lendings UH, funding structure, 156 00:08:26,040 --> 00:08:29,520 Speaker 1: different investment horizon UH. And they provide to growth to 157 00:08:29,680 --> 00:08:33,240 Speaker 1: the financial system, provide lending, provide financial services, so that 158 00:08:33,360 --> 00:08:36,720 Speaker 1: part is good. Other reason, and it's not just financial regulation. 159 00:08:36,920 --> 00:08:39,720 Speaker 1: Activities move away from the banks to the non bank 160 00:08:39,720 --> 00:08:43,600 Speaker 1: financial intermediation sector also because of technology, so some changing 161 00:08:43,640 --> 00:08:46,280 Speaker 1: market structure are conducive to being done outside of the 162 00:08:46,280 --> 00:08:49,720 Speaker 1: bank's balance is there too structure they're non nimble enough. 163 00:08:50,200 --> 00:08:52,959 Speaker 1: There are also conjunctual aspect right. So for example, when 164 00:08:53,000 --> 00:08:56,400 Speaker 1: you are at zero interest rate for all ten plus years, 165 00:08:56,720 --> 00:08:58,840 Speaker 1: it's normal and some of the risk cree shuffles around 166 00:08:58,880 --> 00:09:01,319 Speaker 1: their way from the banking sector and then the last one, 167 00:09:01,360 --> 00:09:05,240 Speaker 1: perhaps especially in advance a Gono, the center banks that 168 00:09:05,320 --> 00:09:09,080 Speaker 1: played an important role, people may say too large a 169 00:09:09,200 --> 00:09:11,400 Speaker 1: role in a number of markets, and so that's an 170 00:09:11,440 --> 00:09:14,120 Speaker 1: impact on pricing itself. So there's a number of factor 171 00:09:14,200 --> 00:09:17,040 Speaker 1: I think that contributed to this. Some are positive, some 172 00:09:17,120 --> 00:09:20,880 Speaker 1: are still I think open for assessment. You know, you 173 00:09:20,920 --> 00:09:24,680 Speaker 1: mentioned Archagos, and one thing I often wonder is in 174 00:09:24,760 --> 00:09:29,360 Speaker 1: the market, we talk a lot about excesses and stretched valuations, 175 00:09:29,440 --> 00:09:32,520 Speaker 1: and those seem like bad things, but they don't always 176 00:09:32,640 --> 00:09:36,480 Speaker 1: manifest in terms of financial stability risk except Archaicos was 177 00:09:36,520 --> 00:09:38,840 Speaker 1: actually a really good example of that. So could you 178 00:09:38,880 --> 00:09:41,560 Speaker 1: maybe talk a little bit about how you see, you know, 179 00:09:41,600 --> 00:09:44,640 Speaker 1: on a day when we're talking about financial conditions basically 180 00:09:44,640 --> 00:09:47,440 Speaker 1: going back to where they were before the FED started hiking, 181 00:09:47,760 --> 00:09:50,560 Speaker 1: talk to us about what excess in the market means 182 00:09:50,640 --> 00:09:53,640 Speaker 1: for financial stability. So there's two aspects of this, right, 183 00:09:53,679 --> 00:09:55,120 Speaker 1: So I want us to do that if you want 184 00:09:55,120 --> 00:09:57,719 Speaker 1: to call it like price misalignment or financial conditions are 185 00:09:57,760 --> 00:10:01,120 Speaker 1: too easy compared to the fundamental values. However you measure 186 00:10:01,120 --> 00:10:05,280 Speaker 1: fundamental values, that's one piece. I think that if there 187 00:10:05,320 --> 00:10:07,880 Speaker 1: are is no leverage employed, if there is no major 188 00:10:08,000 --> 00:10:11,640 Speaker 1: liquidly mismatch. No, it's not necessary systemic per set. Someone 189 00:10:11,679 --> 00:10:13,640 Speaker 1: will lose money, someone will make money, but let's not 190 00:10:13,679 --> 00:10:17,280 Speaker 1: part of my job. The concern is when that unwinding 191 00:10:17,440 --> 00:10:22,120 Speaker 1: of financial condition interact with vulnerabilities liquidity or in case 192 00:10:22,160 --> 00:10:25,520 Speaker 1: of our chegos, is financial leverage, right, because then that 193 00:10:25,600 --> 00:10:28,400 Speaker 1: vulnerability becomes a major amplifier. So it's not just that 194 00:10:28,600 --> 00:10:32,240 Speaker 1: risk as surprise risk risk as a reprise is that 195 00:10:32,240 --> 00:10:35,080 Speaker 1: the de leveraging in the case become an amplifier of 196 00:10:35,080 --> 00:10:37,160 Speaker 1: the reprise and I fire yourself. And all the de 197 00:10:37,240 --> 00:10:40,120 Speaker 1: leveraging that we saw during the financial crisis, there was 198 00:10:40,240 --> 00:10:43,000 Speaker 1: that component there. I think there was financial level employed 199 00:10:43,040 --> 00:10:46,480 Speaker 1: through the realtives, through prime brokerage, and the other weak 200 00:10:46,559 --> 00:10:49,280 Speaker 1: link there was that that was provided by banks, right, 201 00:10:49,320 --> 00:10:51,560 Speaker 1: and so there was an entry point into the banking sector. 202 00:10:51,960 --> 00:10:53,920 Speaker 1: That's where I think you need to be super careful 203 00:10:53,960 --> 00:10:57,720 Speaker 1: because for a lot of this financing structure or liquidity provision, 204 00:10:58,120 --> 00:11:01,200 Speaker 1: somehow it touches a balance of back in some formal 205 00:11:01,320 --> 00:11:04,280 Speaker 1: shape somewhere along the chain hits the Boden set of 206 00:11:04,320 --> 00:11:06,960 Speaker 1: the bank. So part of it it's a risk, but 207 00:11:07,000 --> 00:11:09,480 Speaker 1: it's it's an opportunity for the regulativity should be able 208 00:11:09,520 --> 00:11:21,760 Speaker 1: to see it once it touched the bond shield bank. 209 00:11:25,720 --> 00:11:27,760 Speaker 1: You know another thing that I think when I think 210 00:11:27,760 --> 00:11:30,520 Speaker 1: about the last year, maybe the last two years, is 211 00:11:31,400 --> 00:11:33,920 Speaker 1: uh sitting aside the market volatility. There was a lot 212 00:11:33,960 --> 00:11:36,400 Speaker 1: of growth, I mean, and maybe it's just nominal growth. 213 00:11:36,440 --> 00:11:38,079 Speaker 1: But of course with if you have a debt, like 214 00:11:38,120 --> 00:11:40,880 Speaker 1: the most important thing is you get it paid. How 215 00:11:40,960 --> 00:11:45,000 Speaker 1: much does just that maintaining a growing economy, unlike say 216 00:11:45,120 --> 00:11:47,680 Speaker 1: what we saw in the second half of two thou eight, 217 00:11:48,040 --> 00:11:51,080 Speaker 1: how important does that in terms of butchersing financial stability 218 00:11:51,080 --> 00:11:54,400 Speaker 1: is just they're not a lot of people defaulting because 219 00:11:54,600 --> 00:11:58,199 Speaker 1: people have good incomes, whether it's households, low unemployment rates 220 00:11:58,280 --> 00:12:02,080 Speaker 1: or low default rates for corporation. So usually um, the 221 00:12:02,160 --> 00:12:04,720 Speaker 1: one this is how we used to look at the FED. Growth. 222 00:12:04,720 --> 00:12:07,280 Speaker 1: To me, it's a precondition for financials to build it. Right. 223 00:12:07,320 --> 00:12:10,400 Speaker 1: You cannot have franchis debate without you need growth. So 224 00:12:10,440 --> 00:12:13,120 Speaker 1: growth it's really important. And so that growth that came 225 00:12:13,240 --> 00:12:16,280 Speaker 1: off the if you want the procession if you want 226 00:12:16,280 --> 00:12:18,200 Speaker 1: to called the way of the COVID was in part 227 00:12:18,240 --> 00:12:22,160 Speaker 1: because Center Bank stepped in majority. Right, So the FED 228 00:12:22,240 --> 00:12:24,400 Speaker 1: here at a major central bank and ended up back 229 00:12:24,440 --> 00:12:27,600 Speaker 1: stopping the full financial system. If you compare that with 230 00:12:27,720 --> 00:12:31,359 Speaker 1: two thousand and eight, back stopping was faster, more aggressive, 231 00:12:31,400 --> 00:12:34,840 Speaker 1: and wider. U. The other difference with two thousand and 232 00:12:34,840 --> 00:12:37,080 Speaker 1: seven two dosan A was fiscal policy. Right. So if 233 00:12:37,120 --> 00:12:39,720 Speaker 1: you remember the size of the ABAN administration physical plan 234 00:12:40,000 --> 00:12:42,520 Speaker 1: and think about the number of physical measures they've been 235 00:12:42,559 --> 00:12:45,880 Speaker 1: taking the US during COVID and the size of those, right, 236 00:12:46,400 --> 00:12:49,760 Speaker 1: the combination the two easy financial condition plus physical policy 237 00:12:49,800 --> 00:12:53,560 Speaker 1: as turbosh are essentially the economy now. Downside of that 238 00:12:53,720 --> 00:12:57,199 Speaker 1: is I think perhaps we as a community in general, policymaker, 239 00:12:57,280 --> 00:13:00,120 Speaker 1: maybe market so we have been slow to recognize is 240 00:13:00,160 --> 00:13:04,280 Speaker 1: the inflation problem? Right, So because growth was going fast 241 00:13:04,360 --> 00:13:07,720 Speaker 1: and because physical policy and be using that size for 242 00:13:07,760 --> 00:13:11,600 Speaker 1: a while, Um, that's where I think the concern is now, 243 00:13:11,679 --> 00:13:13,440 Speaker 1: and this is why we went into the Tilaning Morning, 244 00:13:13,480 --> 00:13:15,560 Speaker 1: Repolis and so on. So the flip side of that 245 00:13:15,600 --> 00:13:18,880 Speaker 1: fast growth has been inflation at levels that we haven't 246 00:13:18,880 --> 00:13:22,520 Speaker 1: seen since the plate seventy early eighties. Is inflation? How 247 00:13:22,559 --> 00:13:26,440 Speaker 1: does inflation manifest itself in financial stability risks? Yeah, So 248 00:13:26,520 --> 00:13:28,920 Speaker 1: that's that's the risk here, And I think That's why 249 00:13:29,040 --> 00:13:31,600 Speaker 1: priced ability is so important. Is that if you don't 250 00:13:31,640 --> 00:13:35,240 Speaker 1: tackle inflation now, So if you don't let prevent inflationary 251 00:13:35,280 --> 00:13:38,319 Speaker 1: pressure from becoming entrenched into the infression dynamics, so core 252 00:13:38,360 --> 00:13:43,000 Speaker 1: inflation wages and you'll let inflation expectation and more from 253 00:13:43,040 --> 00:13:45,280 Speaker 1: the target is going to be way more expensive to 254 00:13:45,280 --> 00:13:48,439 Speaker 1: bring inflation down. So in sometimes the personally I don't think. 255 00:13:48,440 --> 00:13:50,200 Speaker 1: I think there is in a symmetryn cost here, right, 256 00:13:50,240 --> 00:13:52,760 Speaker 1: So if you say, okay, what's the cost sire? If 257 00:13:52,800 --> 00:13:56,080 Speaker 1: I am tithening not enough for if tithing I'm not 258 00:13:56,120 --> 00:13:58,480 Speaker 1: tithening too much, that's when I think the cost society 259 00:13:58,480 --> 00:14:00,680 Speaker 1: if you're not aggressively approached this. Do you think of 260 00:14:00,760 --> 00:14:03,400 Speaker 1: the late sevent y earlieries in the US, It took 261 00:14:03,440 --> 00:14:06,800 Speaker 1: a lot of high any more other policy bring in 262 00:14:06,800 --> 00:14:10,360 Speaker 1: freshtion down, right, So being proactive and preventing the entrenchment 263 00:14:10,440 --> 00:14:14,640 Speaker 1: and increasing frention in pressing expectation, I think it's crucial 264 00:14:14,679 --> 00:14:17,080 Speaker 1: because you can control it, then you can bring invent 265 00:14:17,120 --> 00:14:20,760 Speaker 1: eventually you can bring race down to a rather I'm 266 00:14:20,760 --> 00:14:23,160 Speaker 1: supposed to go now. Of course, if you do this 267 00:14:23,280 --> 00:14:27,160 Speaker 1: space on which this is done, financial condition tied. If anything. Now, 268 00:14:27,240 --> 00:14:31,040 Speaker 1: the puzzle is why they haven't tied more than otherwise. Right, 269 00:14:31,640 --> 00:14:33,640 Speaker 1: any model that we you run, if you say, okay 270 00:14:33,680 --> 00:14:36,480 Speaker 1: that the frisk free rate moves by four and fifty 271 00:14:36,480 --> 00:14:40,040 Speaker 1: basis point, I think example, at least based on historical relationship, 272 00:14:40,040 --> 00:14:42,160 Speaker 1: will tell you the financial condition should be way tighter. 273 00:14:42,960 --> 00:14:47,680 Speaker 1: I mean, we had merged. It was just the FED, 274 00:14:48,040 --> 00:14:50,640 Speaker 1: you know, in addition to the massive stimulus and or 275 00:14:50,640 --> 00:14:53,480 Speaker 1: a couple other rounds of stimulus afterwards, and then the 276 00:14:53,520 --> 00:14:56,720 Speaker 1: Fed just you know, opening up one acronym after another 277 00:14:56,920 --> 00:15:00,600 Speaker 1: trying to backstop the market. And maybe you know, retrospect 278 00:15:00,600 --> 00:15:03,520 Speaker 1: that contributed to inflation. But was that a sort of 279 00:15:03,560 --> 00:15:06,880 Speaker 1: like you know, from your perspective, it is like this 280 00:15:06,960 --> 00:15:09,280 Speaker 1: is an example of we saw what happened in two 281 00:15:09,280 --> 00:15:11,120 Speaker 1: thousand and eight, two thousand nine when we go slow 282 00:15:11,160 --> 00:15:14,440 Speaker 1: and we let growth collapse, when we've let nominal income collapsed, 283 00:15:14,640 --> 00:15:18,360 Speaker 1: and sort of a successful lesson learned. I have no 284 00:15:18,440 --> 00:15:20,760 Speaker 1: doubt that was successful. I mean the alternative would have 285 00:15:20,760 --> 00:15:22,640 Speaker 1: been like fall into a creator of growth right in 286 00:15:22,720 --> 00:15:27,280 Speaker 1: the Great Procession story. Um. The issue is that that 287 00:15:27,400 --> 00:15:30,560 Speaker 1: response and the easing of financial condition and the build 288 00:15:30,640 --> 00:15:33,320 Speaker 1: up of some of the vulnerability highlighted. Some of the 289 00:15:33,360 --> 00:15:37,560 Speaker 1: reform agenda that you mentioned before has now been addressed. Right. 290 00:15:37,600 --> 00:15:40,160 Speaker 1: So the chapter that we pulled out in last October, 291 00:15:40,160 --> 00:15:42,440 Speaker 1: it was about open end investment fund and that's an example. 292 00:15:42,600 --> 00:15:45,880 Speaker 1: I think a sector where there are liquid in mismatch, right, 293 00:15:45,920 --> 00:15:50,560 Speaker 1: particularly those open and investment fund to have daily redemption 294 00:15:51,080 --> 00:15:54,120 Speaker 1: for a liquidous right think about high you know, corporate 295 00:15:54,160 --> 00:15:56,960 Speaker 1: bond for example, That's where I think there is case 296 00:15:57,000 --> 00:15:59,760 Speaker 1: and that's what we have seen. In March twenty the 297 00:16:00,000 --> 00:16:04,560 Speaker 1: outflows from those open ended funds was about five percent 298 00:16:04,640 --> 00:16:07,600 Speaker 1: of assets. That was larger than during the financial crisis. 299 00:16:08,120 --> 00:16:11,080 Speaker 1: Um and the camera faction of the FED not stepping 300 00:16:11,080 --> 00:16:13,960 Speaker 1: in very quickly and starting to backstop not just quei 301 00:16:14,320 --> 00:16:17,400 Speaker 1: or supporters by back stopping current market would have been 302 00:16:17,440 --> 00:16:20,120 Speaker 1: a much larger decline. A surprises, right. So what we 303 00:16:20,200 --> 00:16:23,920 Speaker 1: show in that chapter, it's one that there is a 304 00:16:24,000 --> 00:16:27,800 Speaker 1: link between the liquidity of the funds and what they hold, right. 305 00:16:27,840 --> 00:16:30,200 Speaker 1: So assets that are held by liquid funds tend to 306 00:16:30,280 --> 00:16:32,800 Speaker 1: drop in prices much more and that there are much 307 00:16:32,800 --> 00:16:35,960 Speaker 1: more volatility in return. So for example, once and the 308 00:16:36,000 --> 00:16:38,280 Speaker 1: deviation shock in the liquidity or some sort of what 309 00:16:38,360 --> 00:16:42,520 Speaker 1: you saw in March twenty increase volatility of return by 310 00:16:42,880 --> 00:16:45,600 Speaker 1: which is a large, significantly large number. And that's where 311 00:16:45,640 --> 00:16:47,800 Speaker 1: I think you need to think about doing what what 312 00:16:47,840 --> 00:16:50,400 Speaker 1: do we need to fit fit in terms of policy agenda, 313 00:16:50,720 --> 00:16:52,680 Speaker 1: is there a whole we need to think about the 314 00:16:52,800 --> 00:16:57,000 Speaker 1: regulatory emiter, what tools do we need? So, just on 315 00:16:57,080 --> 00:17:00,920 Speaker 1: the snow, there is that inherent tension between you know, 316 00:17:01,000 --> 00:17:04,160 Speaker 1: offering someone liquid assets and putting them in some sort 317 00:17:04,160 --> 00:17:06,359 Speaker 1: of liquid wrapper that allows them to go in and 318 00:17:06,400 --> 00:17:10,640 Speaker 1: out on a daily basis. What is the fund's view 319 00:17:10,800 --> 00:17:12,919 Speaker 1: on the best way to deal with that risk? And 320 00:17:13,000 --> 00:17:16,520 Speaker 1: also given what we saw in when the FED effectively 321 00:17:16,600 --> 00:17:19,880 Speaker 1: came in and back stopped not just credit markets but 322 00:17:20,400 --> 00:17:23,159 Speaker 1: the treasury market as well, which is supposed to be 323 00:17:23,200 --> 00:17:26,160 Speaker 1: the most liquid market in the world, Like, does that 324 00:17:26,240 --> 00:17:30,040 Speaker 1: mean was that the endgame problem solved? Central banks back 325 00:17:30,080 --> 00:17:32,960 Speaker 1: stop this and liquidity risk is no longer an issue? No, 326 00:17:33,200 --> 00:17:35,840 Speaker 1: So my personal view is that if you want to 327 00:17:35,840 --> 00:17:38,080 Speaker 1: live in a world where every X number of years 328 00:17:38,119 --> 00:17:40,200 Speaker 1: the center banks needs to step in and back stop 329 00:17:40,280 --> 00:17:43,680 Speaker 1: the financial system and every time push the line one more, 330 00:17:43,960 --> 00:17:46,359 Speaker 1: I think you need to rethink the regulatory perimier. Then, right, 331 00:17:46,359 --> 00:17:48,720 Speaker 1: if you want to be on the perceiving end of 332 00:17:48,760 --> 00:17:51,399 Speaker 1: the financial sector back stop, then the perimer need to 333 00:17:51,400 --> 00:17:53,439 Speaker 1: be different, right, So you need to be within the periment. 334 00:17:53,480 --> 00:17:56,600 Speaker 1: They're not outside the perimid obviously, but there's a different 335 00:17:56,600 --> 00:17:59,760 Speaker 1: way of thinking about financial stabilities because systemic risk at 336 00:17:59,760 --> 00:18:02,480 Speaker 1: that point it right. So the issue here is that 337 00:18:02,560 --> 00:18:06,680 Speaker 1: you're providing dare liquidly when there is underlying a liquid US. Now, 338 00:18:06,760 --> 00:18:08,919 Speaker 1: of course they all liquidly buffer and so on, so 339 00:18:08,960 --> 00:18:12,520 Speaker 1: that's a threshold for period of non stress. Perhaps the 340 00:18:12,600 --> 00:18:15,439 Speaker 1: system is fine, people can have different views. The problem 341 00:18:15,480 --> 00:18:18,600 Speaker 1: is during stress if you eat through the liquidly buffer. Therefore, 342 00:18:18,680 --> 00:18:21,280 Speaker 1: to sell us right, you face redemption. You sell, you 343 00:18:21,359 --> 00:18:24,840 Speaker 1: generally fire yourself. And because of the structure, there is 344 00:18:24,880 --> 00:18:27,280 Speaker 1: an incentive to run first because you're not bearing the 345 00:18:27,320 --> 00:18:30,640 Speaker 1: transaction cost when you get out the way this is designed, 346 00:18:30,920 --> 00:18:32,720 Speaker 1: and so I want to get out the first before 347 00:18:33,080 --> 00:18:35,639 Speaker 1: the market's price are going down essentially the enemy, so 348 00:18:35,720 --> 00:18:40,560 Speaker 1: that generate the run dynamics. That has important systemic implication 349 00:18:40,600 --> 00:18:43,679 Speaker 1: because you go into fire sale and that social cost 350 00:18:43,800 --> 00:18:46,920 Speaker 1: of the first mover is not addressed by the way 351 00:18:47,119 --> 00:18:50,240 Speaker 1: the design of this of these fissures are now so 352 00:18:51,400 --> 00:18:52,800 Speaker 1: what we look at. We look at a bunch of 353 00:18:52,800 --> 00:18:57,400 Speaker 1: possible solution there measure and we did some work across countries. Usually, 354 00:18:57,400 --> 00:19:00,360 Speaker 1: what the most common tools in terms of liquidly risk 355 00:19:00,400 --> 00:19:04,600 Speaker 1: management tools are either suspension obviously or redemption gates or 356 00:19:04,600 --> 00:19:08,680 Speaker 1: redemption fast. Those are pretty much widespread. What is much 357 00:19:08,800 --> 00:19:12,240 Speaker 1: less common is either what because swing prices so essentially 358 00:19:12,240 --> 00:19:14,800 Speaker 1: the ability to incorporates in the price you pay to 359 00:19:14,880 --> 00:19:18,240 Speaker 1: exit of the externality or if you want the transaction 360 00:19:18,280 --> 00:19:20,800 Speaker 1: cause the impose of those sustained the fund. Those are 361 00:19:20,840 --> 00:19:23,800 Speaker 1: not common or not the in in DUS for sure, and 362 00:19:23,840 --> 00:19:26,760 Speaker 1: even in Europe or in some sense they're voluntary. And 363 00:19:26,800 --> 00:19:28,639 Speaker 1: then this open debate of what do you do with 364 00:19:28,680 --> 00:19:30,680 Speaker 1: the liquid buffer? Do they work or not? So what 365 00:19:30,760 --> 00:19:34,119 Speaker 1: we find there is that the liquidity buffer that seems 366 00:19:34,119 --> 00:19:36,800 Speaker 1: to be some relationship between the liquid of the underlying 367 00:19:36,840 --> 00:19:40,320 Speaker 1: and liquid buffer. That is, if you hold more liquid usset, 368 00:19:40,440 --> 00:19:43,760 Speaker 1: you generally on average, tend to have higher liquid buffer. 369 00:19:44,720 --> 00:19:47,639 Speaker 1: The results that's more interesting though, is that one there 370 00:19:47,720 --> 00:19:50,920 Speaker 1: is very widespread use of this liquid buffers. Some when 371 00:19:50,920 --> 00:19:53,119 Speaker 1: you talk to people to in market, some tend to 372 00:19:53,160 --> 00:19:56,120 Speaker 1: actually use them actively. So I'm gonna sell the most 373 00:19:56,160 --> 00:19:58,600 Speaker 1: liquid stuff, use my ready lines and hope for the 374 00:19:58,640 --> 00:20:01,439 Speaker 1: best if you want. Others don't want to touch it 375 00:20:01,760 --> 00:20:03,520 Speaker 1: because they don't know what's coming nest and so they 376 00:20:03,520 --> 00:20:06,280 Speaker 1: start selling less liquid stuff. So there's a very different 377 00:20:06,600 --> 00:20:09,360 Speaker 1: use of this liquidity buffer. But on average at least, 378 00:20:09,400 --> 00:20:12,960 Speaker 1: what we find is that during stress, the average fund 379 00:20:12,960 --> 00:20:14,800 Speaker 1: if you want, tend to grow the relear butter. They 380 00:20:14,800 --> 00:20:16,040 Speaker 1: just don't want to use it. They don't know what 381 00:20:16,080 --> 00:20:18,919 Speaker 1: it's coming. So if that's the case, that is not 382 00:20:19,040 --> 00:20:22,720 Speaker 1: helpful for the example incentive to run right, it doesn't 383 00:20:22,720 --> 00:20:27,200 Speaker 1: prevent that. Swing prices are mostly used in Europe. Again, 384 00:20:27,240 --> 00:20:29,800 Speaker 1: swing prices the ability a century to correct the price 385 00:20:29,880 --> 00:20:32,480 Speaker 1: which you take money out based on this transaction costs 386 00:20:32,480 --> 00:20:36,040 Speaker 1: they impost on others. The problem is in principle they 387 00:20:36,080 --> 00:20:38,960 Speaker 1: are effective to reduce volatility. The problem is that the 388 00:20:39,000 --> 00:20:41,200 Speaker 1: buffer of the swing factor, if you want, how much 389 00:20:41,240 --> 00:20:43,240 Speaker 1: of this is used, is too small compared to what 390 00:20:43,359 --> 00:20:47,199 Speaker 1: would be used, and either because of competitive reason or 391 00:20:47,280 --> 00:20:50,320 Speaker 1: because of stigma, whatever the reason is, they're not calibrated 392 00:20:50,400 --> 00:20:53,240 Speaker 1: to the way that they should be calibrated during stress time. 393 00:20:53,359 --> 00:20:57,760 Speaker 1: At least, another option, which is more extreme if you 394 00:20:57,800 --> 00:21:01,199 Speaker 1: want is to more formally link your ability to exit 395 00:21:01,280 --> 00:21:04,640 Speaker 1: these vehicles from to the liquid of the underlying right. 396 00:21:04,680 --> 00:21:07,800 Speaker 1: So you mentioned the real estate one, they're the liquid. 397 00:21:07,840 --> 00:21:09,960 Speaker 1: It is not daily, right, you only a specific period 398 00:21:09,960 --> 00:21:13,920 Speaker 1: where you can withdraw. Um. If you go into landmark 399 00:21:14,000 --> 00:21:16,280 Speaker 1: in duance and you go back decades, there was no 400 00:21:16,359 --> 00:21:18,719 Speaker 1: daily liquidity. They used to be if I remember correctly, 401 00:21:18,760 --> 00:21:21,640 Speaker 1: intermitted funds or there were quarterly, monthly quickly. You need 402 00:21:21,680 --> 00:21:24,640 Speaker 1: to give advance and then when it comes time you withdraw. 403 00:21:25,440 --> 00:21:28,040 Speaker 1: That allows you to I think, manage liquidly better. I 404 00:21:28,119 --> 00:21:30,840 Speaker 1: think there's a lot of controversy and whether you should 405 00:21:32,160 --> 00:21:35,520 Speaker 1: restrict liquidity that can be given based on the underlying 406 00:21:35,560 --> 00:21:39,560 Speaker 1: but that that would be in principle the cleanest way 407 00:21:39,600 --> 00:21:43,159 Speaker 1: to fix the underlying mismatch between the liquidity and the 408 00:21:43,240 --> 00:21:46,040 Speaker 1: underlying assets. So just on that note, you know, one 409 00:21:46,080 --> 00:21:48,760 Speaker 1: thing with liquidity is I think a lot of times 410 00:21:48,760 --> 00:21:52,000 Speaker 1: when people talk about liquidity risk, often they're talking about 411 00:21:52,200 --> 00:21:54,200 Speaker 1: basically priced risk and the risk that you're going to 412 00:21:54,240 --> 00:21:56,680 Speaker 1: see a big drop when you try to sell. How 413 00:21:56,680 --> 00:22:00,240 Speaker 1: do you just aggregate those two things? And also there 414 00:22:00,240 --> 00:22:03,000 Speaker 1: there is an argument to be made that UM, if 415 00:22:03,000 --> 00:22:05,400 Speaker 1: you're holding a liquid assets and if you can get 416 00:22:05,440 --> 00:22:08,520 Speaker 1: away from marking them to market. UM. That often that 417 00:22:08,640 --> 00:22:12,200 Speaker 1: it can actually see you through a rough patch. Right. Again, 418 00:22:12,240 --> 00:22:15,080 Speaker 1: we see this with real estate nowadays, which is like 419 00:22:15,320 --> 00:22:17,720 Speaker 1: a lot of the big funds haven't had to mark 420 00:22:17,800 --> 00:22:20,920 Speaker 1: their assets to market and they're sort of holding on 421 00:22:21,000 --> 00:22:25,280 Speaker 1: waiting for a potential recovery and that helps in the interim, 422 00:22:25,320 --> 00:22:28,919 Speaker 1: so less I would deliquately one UM. I think they 423 00:22:29,119 --> 00:22:34,040 Speaker 1: take the treasury market here, the kid market in the UK, right, um. 424 00:22:34,240 --> 00:22:36,159 Speaker 1: And the issue was that in some cases it was 425 00:22:36,240 --> 00:22:38,600 Speaker 1: really hard to sell that you couldnot find a bit. 426 00:22:38,800 --> 00:22:41,080 Speaker 1: Right even if this are supposed to be the most liquid, 427 00:22:41,440 --> 00:22:44,240 Speaker 1: the most liquid fund, so you should not see those 428 00:22:44,240 --> 00:22:46,680 Speaker 1: in the most liquid markets. That's supposed to be the 429 00:22:46,760 --> 00:22:50,960 Speaker 1: risk for assets, right, you should be able to sell um. 430 00:22:51,119 --> 00:22:53,199 Speaker 1: The issue with liquidly, I think has to do with 431 00:22:53,480 --> 00:22:56,600 Speaker 1: the fact that often also interact withies. Right. I made 432 00:22:56,640 --> 00:22:58,879 Speaker 1: the example of leveage, right, that's what we called liquid 433 00:22:58,880 --> 00:23:02,159 Speaker 1: is spiral at least and in the in the in 434 00:23:02,200 --> 00:23:05,800 Speaker 1: the profession, that's where liquidity and leverage interact with each other. 435 00:23:06,359 --> 00:23:08,440 Speaker 1: My personal view is getting rid of market to market. 436 00:23:08,520 --> 00:23:12,080 Speaker 1: It's kind of like hiding a little bit um. I 437 00:23:12,160 --> 00:23:15,560 Speaker 1: want investor to be able to price risk and not 438 00:23:15,720 --> 00:23:18,639 Speaker 1: mark into market. And I can see the argument of saying, okay, 439 00:23:18,680 --> 00:23:21,160 Speaker 1: if I can only bridge to there, then the world 440 00:23:21,240 --> 00:23:23,520 Speaker 1: is going to be in a better place. My view 441 00:23:23,600 --> 00:23:26,879 Speaker 1: is that you need liquidity, you need to provide disclosure, 442 00:23:26,880 --> 00:23:29,880 Speaker 1: more disclosure. I'm only favor of disclosing trade for example, 443 00:23:30,320 --> 00:23:33,280 Speaker 1: because in the end, yes, you will take a loss, 444 00:23:33,320 --> 00:23:36,600 Speaker 1: but your price markets where they're supposed to be past 445 00:23:36,640 --> 00:23:39,520 Speaker 1: experience during the financial crisis, and when the pricing of 446 00:23:39,640 --> 00:23:42,600 Speaker 1: risk in the subprime market will postpone. I don't think 447 00:23:42,640 --> 00:23:44,040 Speaker 1: that's where we want to be. I think we want 448 00:23:44,040 --> 00:23:45,560 Speaker 1: to be in a place where your price market. Yes, 449 00:23:45,640 --> 00:23:49,000 Speaker 1: sometimes it's gonna overshoot. You know, both of you talked 450 00:23:49,000 --> 00:23:52,119 Speaker 1: about the l d I situation in the UK, and 451 00:23:52,160 --> 00:23:55,520 Speaker 1: of course in March we had that big dislocation in 452 00:23:55,560 --> 00:23:58,479 Speaker 1: the treasury market, but it was sold fairly quickly in 453 00:23:58,600 --> 00:24:01,119 Speaker 1: terms of the Central Brank step in and was a buyer, 454 00:24:01,240 --> 00:24:05,199 Speaker 1: and then the prices returned to normal and then subsequently 455 00:24:05,359 --> 00:24:08,679 Speaker 1: to March, and the FED is set up a standing 456 00:24:08,720 --> 00:24:12,800 Speaker 1: repo facility and so like, there's even more liquidity available 457 00:24:12,880 --> 00:24:17,879 Speaker 1: theoretically for treasury buyers. How powerful is that just looking 458 00:24:17,880 --> 00:24:20,439 Speaker 1: at the sort of risk free assets within any given 459 00:24:20,520 --> 00:24:24,800 Speaker 1: country to what degreetion more is, would you should more 460 00:24:24,880 --> 00:24:29,680 Speaker 1: central banks set up more robust facilities to create sort 461 00:24:29,680 --> 00:24:32,680 Speaker 1: of like both directional liquidity for holders of government debt. 462 00:24:33,600 --> 00:24:36,160 Speaker 1: So I don't think personally that the central bank should 463 00:24:36,200 --> 00:24:38,720 Speaker 1: in the business of managing data equally, right, so I 464 00:24:38,720 --> 00:24:40,760 Speaker 1: can see it all. What the central bank is the 465 00:24:40,760 --> 00:24:44,040 Speaker 1: blendard of last result of the proliquidity provider of last resort. 466 00:24:44,720 --> 00:24:47,240 Speaker 1: What the standing rip of facilities meant to do. It's 467 00:24:47,280 --> 00:24:50,920 Speaker 1: meant to cap in some tense rates, right, So they 468 00:24:50,920 --> 00:24:53,040 Speaker 1: don't want to see what you saw in September nineteen 469 00:24:53,080 --> 00:24:56,600 Speaker 1: where when they would normalizing the balance, it preparate. That's 470 00:24:56,600 --> 00:24:58,600 Speaker 1: what the facility is meant to be. That is not 471 00:24:58,720 --> 00:25:00,600 Speaker 1: meant to be a day to day a normal way 472 00:25:00,600 --> 00:25:02,959 Speaker 1: of providing liquid liquidly. It's in the market. There are 473 00:25:03,000 --> 00:25:06,320 Speaker 1: buyers and seller. That's how the systems should work. What's 474 00:25:06,400 --> 00:25:09,560 Speaker 1: changing the treasury market is that the underlying structure has changed. Right. 475 00:25:09,560 --> 00:25:11,760 Speaker 1: What the broker deer used to do now is done 476 00:25:11,800 --> 00:25:15,080 Speaker 1: by principal trading firms is done by firms. They are 477 00:25:15,119 --> 00:25:17,920 Speaker 1: not part of the trade shop banking system and they're 478 00:25:17,920 --> 00:25:23,200 Speaker 1: not within the traditional regulatory perimeter. That it's technology evolution. 479 00:25:23,400 --> 00:25:26,080 Speaker 1: I think the question is where the perimeter should be. 480 00:25:26,480 --> 00:25:28,800 Speaker 1: There are also a major discuss again have to do 481 00:25:28,840 --> 00:25:32,560 Speaker 1: with transparency of trades, so disclosing trades and whether you 482 00:25:32,600 --> 00:25:35,639 Speaker 1: should use central camera party to net some of this 483 00:25:35,720 --> 00:25:38,199 Speaker 1: position out then reduce some of the plosure, whether they 484 00:25:38,240 --> 00:25:42,280 Speaker 1: would free up balance it effectively to provide liquidly. I 485 00:25:42,320 --> 00:25:45,359 Speaker 1: don't think that daily to day job or a center 486 00:25:45,400 --> 00:25:47,600 Speaker 1: bank should be provide liquid in the markets. To me, 487 00:25:47,720 --> 00:25:50,840 Speaker 1: that's a lender of last resort function that I think 488 00:25:50,840 --> 00:25:54,119 Speaker 1: it's super important. Uh. That is a question though that 489 00:25:54,200 --> 00:25:57,280 Speaker 1: if you have access to the lender of last resort 490 00:25:57,320 --> 00:26:00,600 Speaker 1: function of a center bank, how to where the perimeter 491 00:26:00,720 --> 00:26:03,160 Speaker 1: of the regulations should be. You can't be just receiving 492 00:26:03,160 --> 00:26:05,320 Speaker 1: a check and then the central bank should be completely 493 00:26:05,320 --> 00:26:08,320 Speaker 1: out the business. Personally, I think that's a very uncomfortable 494 00:26:08,320 --> 00:26:11,800 Speaker 1: business for a center bank to run. Just on this 495 00:26:11,880 --> 00:26:15,520 Speaker 1: liquidity question, one of our all time favorite All Thoughts guests, 496 00:26:15,600 --> 00:26:20,879 Speaker 1: Chris White, said something on the podcast once which was 497 00:26:21,480 --> 00:26:25,320 Speaker 1: he asked a question, which is is liquidity something which 498 00:26:25,359 --> 00:26:28,560 Speaker 1: sort of happens naturally if you have a market that 499 00:26:28,720 --> 00:26:33,200 Speaker 1: is properly networked with people talking to each other, or 500 00:26:33,320 --> 00:26:35,960 Speaker 1: is it a service that you should have to pay 501 00:26:36,080 --> 00:26:39,840 Speaker 1: up for? And I'd be curious to hear a regulators 502 00:26:39,920 --> 00:26:43,520 Speaker 1: view on that topic. I think liquid it is a 503 00:26:43,520 --> 00:26:49,160 Speaker 1: financial service and like any other financial service, surprise. The problem, 504 00:26:49,320 --> 00:26:54,200 Speaker 1: I think after fifteen years of zero interest rate, zero volatility, 505 00:26:55,000 --> 00:26:59,399 Speaker 1: pre fat tightening, was that liquidly was no properly price. 506 00:27:00,160 --> 00:27:02,359 Speaker 1: That was a big problem. So you get used to 507 00:27:02,400 --> 00:27:05,720 Speaker 1: a place where liquid it is abundant, it's essentially free, 508 00:27:06,480 --> 00:27:08,440 Speaker 1: and you don't price the risk. Right, So that's a 509 00:27:09,160 --> 00:27:11,840 Speaker 1: think about price of li quickly break it down two pieces, right, 510 00:27:11,920 --> 00:27:14,440 Speaker 1: they expected liquidly and there is premium how much you 511 00:27:14,520 --> 00:27:17,320 Speaker 1: want to pay for insurance if you or if you're 512 00:27:17,359 --> 00:27:19,359 Speaker 1: providing it. I think that part that's where it was 513 00:27:19,400 --> 00:27:21,760 Speaker 1: miss priced. There was a quickly de premium was not paid. 514 00:27:21,800 --> 00:27:24,800 Speaker 1: You are not paying for that. They were not willing 515 00:27:24,800 --> 00:27:27,760 Speaker 1: to pay for. Situation where go away and I think 516 00:27:28,200 --> 00:27:32,200 Speaker 1: the normal interest rate normalizing, volatiality rising eventually. The hope 517 00:27:32,280 --> 00:27:34,720 Speaker 1: is that people will start to price liquidly. They should 518 00:27:34,720 --> 00:27:37,280 Speaker 1: be liquid is not free. Liquickly there's a financial service 519 00:27:37,320 --> 00:27:54,720 Speaker 1: that you should probably pay for and provision for. I 520 00:27:54,720 --> 00:27:56,919 Speaker 1: want to go back to some of these funds that 521 00:27:57,040 --> 00:28:00,680 Speaker 1: occasionally have issues with redemptions. There's the real estate one. Recently, 522 00:28:01,080 --> 00:28:05,720 Speaker 1: I think it was after the energy crash or sixteen 523 00:28:05,800 --> 00:28:08,440 Speaker 1: or that people started worrying about the high yield funds 524 00:28:08,560 --> 00:28:11,680 Speaker 1: or the high yield ETFs in the US and so forth. 525 00:28:11,800 --> 00:28:15,320 Speaker 1: But none of those turned out to be systemic per se. 526 00:28:15,359 --> 00:28:18,280 Speaker 1: I mean, people got anxious about the funds themselves, etcetera. 527 00:28:18,320 --> 00:28:20,840 Speaker 1: But even some of the recent stuff that didn't seem 528 00:28:20,840 --> 00:28:23,960 Speaker 1: like they're a huge spillovers. What is the scenario in 529 00:28:24,000 --> 00:28:27,440 Speaker 1: which something some stress that emanates from some fund or 530 00:28:27,520 --> 00:28:30,480 Speaker 1: some class of funds, because it becomes something that we 531 00:28:30,480 --> 00:28:35,000 Speaker 1: would regulators should be concerned as systemic risk. So it's 532 00:28:35,080 --> 00:28:37,679 Speaker 1: a question about mutual opening the fund or ETF or 533 00:28:37,720 --> 00:28:40,400 Speaker 1: both either one. Howeveryone, Well, let me start with the 534 00:28:40,440 --> 00:28:41,800 Speaker 1: first one that we do open in the funds. I 535 00:28:41,840 --> 00:28:43,720 Speaker 1: think there is because again what I was this described 536 00:28:43,760 --> 00:28:45,600 Speaker 1: before the pop You run for the door because I 537 00:28:45,840 --> 00:28:48,840 Speaker 1: want to come after you, and because they are incentive 538 00:28:48,880 --> 00:28:51,920 Speaker 1: to do that, and then by going out, you generate 539 00:28:51,960 --> 00:28:54,239 Speaker 1: the spiral where you get fire sale because they need 540 00:28:54,240 --> 00:28:56,040 Speaker 1: to weak me they to pay you, and the price 541 00:28:56,080 --> 00:28:59,120 Speaker 1: moves much more than it should have. I would argue, 542 00:28:59,240 --> 00:29:01,280 Speaker 1: if you take twenty when he as an example, that's 543 00:29:01,280 --> 00:29:04,160 Speaker 1: saying the system didn't break, it's a little bit too 544 00:29:05,040 --> 00:29:08,080 Speaker 1: generous as a view. The system didn't break because in 545 00:29:08,080 --> 00:29:10,959 Speaker 1: a month for reserve based of the entire francial system. Right, 546 00:29:11,000 --> 00:29:13,800 Speaker 1: So if I give a counter factual where instead of 547 00:29:14,640 --> 00:29:17,720 Speaker 1: them Monday with another month, my expectation is that the 548 00:29:17,720 --> 00:29:22,120 Speaker 1: system will have cracked in a different places um DTFS. 549 00:29:22,160 --> 00:29:23,920 Speaker 1: I think my views change over time. I think I 550 00:29:24,000 --> 00:29:25,600 Speaker 1: was trying and to look for place what could go 551 00:29:25,680 --> 00:29:29,400 Speaker 1: wrong there. I think they provide an important liquidity function. 552 00:29:29,760 --> 00:29:33,120 Speaker 1: Um you can get out, you just sell you share 553 00:29:33,160 --> 00:29:34,880 Speaker 1: with the FS, and in some sense they do sell 554 00:29:34,920 --> 00:29:38,120 Speaker 1: the price. Right. The concern that I have there is 555 00:29:38,200 --> 00:29:41,120 Speaker 1: more the opaque world of the other ICE participants. Right. 556 00:29:41,160 --> 00:29:45,680 Speaker 1: So the dealers that create and redeem shares, particularly in 557 00:29:45,800 --> 00:29:49,080 Speaker 1: fixed income where inequities, I think it's easier if you 558 00:29:49,120 --> 00:29:51,240 Speaker 1: have the SMP five. The bucket that you use is 559 00:29:51,280 --> 00:29:53,840 Speaker 1: more or less than index. With fix income, the basket 560 00:29:53,880 --> 00:29:56,120 Speaker 1: you used to create and reallym is way smaller than that, 561 00:29:56,640 --> 00:29:59,200 Speaker 1: and there is a lot of opacity exactly what's in 562 00:29:59,240 --> 00:30:02,880 Speaker 1: those baskets is provided to whom. If they don't provide 563 00:30:02,880 --> 00:30:06,200 Speaker 1: the function any breaks down, then the creation redemption can break. Now, 564 00:30:06,200 --> 00:30:08,400 Speaker 1: whether that's systemnic or not, I don't know, But to me, 565 00:30:08,480 --> 00:30:14,000 Speaker 1: that's where one question marks. Just on March specifically, it's like, 566 00:30:14,040 --> 00:30:17,800 Speaker 1: okay that that situation required enormous support from the FED 567 00:30:17,920 --> 00:30:20,360 Speaker 1: and other central banks. But I think with the point 568 00:30:20,360 --> 00:30:23,360 Speaker 1: that you know, we talked to Josh Younger, who's then 569 00:30:23,400 --> 00:30:26,080 Speaker 1: the JP Morgan out the New York FED, like, should 570 00:30:26,120 --> 00:30:30,960 Speaker 1: regulators be optimizing for the type of crisis that emerges 571 00:30:31,040 --> 00:30:34,560 Speaker 1: from a once in a century pandemic? Like I don't know, 572 00:30:34,640 --> 00:30:37,680 Speaker 1: Like is this is it worth like having the system 573 00:30:37,800 --> 00:30:39,520 Speaker 1: be robust or should we say, okay, once in the 574 00:30:39,560 --> 00:30:43,000 Speaker 1: century pandemic, it's not so bad if that requires the 575 00:30:43,040 --> 00:30:45,440 Speaker 1: FED to step in and start spraying money everywhere. The 576 00:30:45,480 --> 00:30:48,800 Speaker 1: first of all, it's two times in a century now 577 00:30:48,840 --> 00:30:51,959 Speaker 1: because it's from the GFC to to UH to COVID, right, 578 00:30:52,000 --> 00:30:55,480 Speaker 1: so it's kind of close to each other. Um, I agree, 579 00:30:55,480 --> 00:30:59,920 Speaker 1: I don't think you should calibrate too financial disaster every time, 580 00:31:00,040 --> 00:31:01,920 Speaker 1: but I think there is something in the middle between 581 00:31:02,040 --> 00:31:04,719 Speaker 1: caliber in like that and what is done now. I 582 00:31:04,760 --> 00:31:07,000 Speaker 1: think there are steps that can be taken to fix 583 00:31:07,040 --> 00:31:12,280 Speaker 1: some of these liquidity mismatch. Whether this is um swing 584 00:31:12,320 --> 00:31:15,280 Speaker 1: prices for example, and utilization of those So regulator can 585 00:31:15,320 --> 00:31:17,920 Speaker 1: for example, provide guidance of the implementation or some of 586 00:31:17,960 --> 00:31:21,240 Speaker 1: these liquidly tools. They can consider whether there some of 587 00:31:21,280 --> 00:31:23,840 Speaker 1: these liquid it would should be mandatory. The problem is 588 00:31:23,880 --> 00:31:27,800 Speaker 1: there's no alignment between the incentives of the individual manager 589 00:31:27,840 --> 00:31:31,479 Speaker 1: of the funds and the system financials to be objective, right, 590 00:31:31,800 --> 00:31:34,239 Speaker 1: If you align those then the system works better. So 591 00:31:34,280 --> 00:31:38,400 Speaker 1: whether this is again guidance, mandatory use of some liquid tools, 592 00:31:38,400 --> 00:31:40,800 Speaker 1: where this is stress testing, whether this is disclosure, I 593 00:31:40,800 --> 00:31:43,040 Speaker 1: think you can find a combination of this. It's gonna 594 00:31:43,040 --> 00:31:46,160 Speaker 1: be a functional country by country, depend on the institutional 595 00:31:46,200 --> 00:31:48,640 Speaker 1: set up, the legal setup can some things can work 596 00:31:48,640 --> 00:31:52,040 Speaker 1: better than others. And again or minimizing the gap between 597 00:31:52,080 --> 00:31:54,239 Speaker 1: the liquidity you provide and the deliquid of the end 598 00:31:54,240 --> 00:31:57,920 Speaker 1: of line. One last point, there is another aspect that 599 00:31:58,040 --> 00:32:00,520 Speaker 1: often it's not discussed in the US, but some of 600 00:32:00,560 --> 00:32:02,920 Speaker 1: these players are made of this open and the funds 601 00:32:02,920 --> 00:32:05,880 Speaker 1: are major players in emerging market and when you see 602 00:32:05,920 --> 00:32:07,959 Speaker 1: this in and out of those flows of those countries, 603 00:32:07,960 --> 00:32:10,440 Speaker 1: you can break those markets very easily. And so there 604 00:32:10,520 --> 00:32:13,160 Speaker 1: is any if you want the cross boarder systemic aspect 605 00:32:13,160 --> 00:32:15,960 Speaker 1: to list. And maybe it's not just us focus, but 606 00:32:16,640 --> 00:32:19,479 Speaker 1: at least from me working at the fund for some countries, 607 00:32:19,520 --> 00:32:21,680 Speaker 1: those are large, large molers. Yeah, I think that's a 608 00:32:21,720 --> 00:32:24,239 Speaker 1: good point. Um, you know you mentioned incentives there. Can 609 00:32:24,280 --> 00:32:26,560 Speaker 1: you talk a little bit more about the incentives at 610 00:32:26,600 --> 00:32:29,720 Speaker 1: play for you know, fund managers for instance, when it 611 00:32:29,720 --> 00:32:32,520 Speaker 1: comes to handling liquidity risk. And one thing you said 612 00:32:32,520 --> 00:32:35,400 Speaker 1: earlier was very interesting to me, this idea that you 613 00:32:35,400 --> 00:32:38,040 Speaker 1: know a lot of these funds will build up liquidity 614 00:32:38,200 --> 00:32:41,400 Speaker 1: or cash buffers, but will be reluctant to actually start 615 00:32:41,480 --> 00:32:45,000 Speaker 1: running them down in times of stress. So that was like, 616 00:32:45,600 --> 00:32:47,520 Speaker 1: there was a time I talked to a few people 617 00:32:47,560 --> 00:32:49,960 Speaker 1: in the loan market how they were marnaging liquidly right. 618 00:32:50,120 --> 00:32:53,360 Speaker 1: One was trying to understand what is your definitional ligue? 619 00:32:53,520 --> 00:32:55,600 Speaker 1: But fore wou do you use? Is the cash is 620 00:32:55,640 --> 00:32:58,560 Speaker 1: the lines of credit, is the most liquid leverage loans, 621 00:32:58,640 --> 00:33:01,880 Speaker 1: your whole treasury security? Is how big the buffer is? 622 00:33:02,040 --> 00:33:04,200 Speaker 1: I mean there's a trade off between Yeah, of course 623 00:33:04,240 --> 00:33:06,400 Speaker 1: you can alde a huge li quickly buffer, but it's 624 00:33:06,400 --> 00:33:08,040 Speaker 1: going to hit your return at some point, right, So 625 00:33:08,080 --> 00:33:09,640 Speaker 1: if I want to invest in the average loans, I 626 00:33:09,640 --> 00:33:13,920 Speaker 1: don't want you to hold twenty indiqudity. So that's one piece. 627 00:33:14,080 --> 00:33:16,360 Speaker 1: The other one was trying to understand the waterfall if 628 00:33:16,400 --> 00:33:18,080 Speaker 1: you went right, how do you manage this? And I 629 00:33:18,080 --> 00:33:21,080 Speaker 1: thought it was quite interesting. Then I got two very 630 00:33:21,080 --> 00:33:24,880 Speaker 1: different response right from I'm gonna start using and selling 631 00:33:24,920 --> 00:33:28,480 Speaker 1: the if I have some liquid liquid a like securities 632 00:33:29,120 --> 00:33:31,640 Speaker 1: after cash, then maybe use my lines of credit. Then 633 00:33:31,720 --> 00:33:34,600 Speaker 1: progressively moved to the rest LIEPID stuff, and then others 634 00:33:34,600 --> 00:33:36,200 Speaker 1: they would tell you I would never at touch it 635 00:33:36,320 --> 00:33:38,640 Speaker 1: now that even if you shoot me, I just because 636 00:33:38,680 --> 00:33:41,040 Speaker 1: I don't know what's next year. I need that as 637 00:33:41,080 --> 00:33:44,200 Speaker 1: my insurance. So I don't think the ARELA should tell 638 00:33:44,240 --> 00:33:46,960 Speaker 1: you exactly whether you should manage this personally. I think 639 00:33:46,960 --> 00:33:51,080 Speaker 1: they should provide some guidance. My sense now that it's 640 00:33:51,200 --> 00:33:54,520 Speaker 1: too much left to the individual manager that does not 641 00:33:54,560 --> 00:33:57,360 Speaker 1: internalize what the system in implication of the behaviors are. 642 00:33:58,200 --> 00:34:00,880 Speaker 1: So one of the things that happened on this podcast 643 00:34:00,920 --> 00:34:03,320 Speaker 1: of doing it for seven years is we've seen this 644 00:34:03,400 --> 00:34:05,440 Speaker 1: evolution in the type of things that we talked about, 645 00:34:05,520 --> 00:34:06,840 Speaker 1: and we used to have, you know, do a lot 646 00:34:06,840 --> 00:34:11,160 Speaker 1: of episodes on like the repo market and credit market, liquidity, 647 00:34:11,200 --> 00:34:13,080 Speaker 1: all these type of things. And then in the last 648 00:34:13,120 --> 00:34:15,759 Speaker 1: two years many of our episodes have become like very 649 00:34:15,760 --> 00:34:20,520 Speaker 1: like physical world commodity risks, one financial crossover with commodities. 650 00:34:20,560 --> 00:34:23,040 Speaker 1: We saw, like you know, there was the crisis at 651 00:34:23,040 --> 00:34:24,960 Speaker 1: some point last year in the nickel trading at the 652 00:34:25,000 --> 00:34:27,560 Speaker 1: London Medals Exchange. Can you talk a little bit about 653 00:34:27,560 --> 00:34:30,120 Speaker 1: how like as this and I don't know how long 654 00:34:30,200 --> 00:34:33,400 Speaker 1: like commodity markets or energy security is going to remain 655 00:34:33,520 --> 00:34:36,000 Speaker 1: so top of mind. But you know, we weren't really 656 00:34:36,000 --> 00:34:39,120 Speaker 1: talking much about that prior to COVID and some of 657 00:34:39,160 --> 00:34:41,200 Speaker 1: the commodity shocks. Can you talk a little bit about 658 00:34:41,400 --> 00:34:44,239 Speaker 1: how you're incorporating some of those stresses into your thinking 659 00:34:44,280 --> 00:34:47,120 Speaker 1: and the challenges of thinking about the markets from a 660 00:34:47,360 --> 00:34:51,040 Speaker 1: financial regulatory perspective. So if the maths sticks that were 661 00:34:51,080 --> 00:34:55,120 Speaker 1: describing before energy trading, we're not there obviously, right So 662 00:34:55,239 --> 00:34:58,239 Speaker 1: and those were not the entities were following clothesly for 663 00:34:59,680 --> 00:35:02,040 Speaker 1: we did. So there was one lesson I think learned 664 00:35:02,239 --> 00:35:05,680 Speaker 1: through in the February episode. I think it's important to 665 00:35:05,719 --> 00:35:08,640 Speaker 1: follow for a number of reason one because they are 666 00:35:09,480 --> 00:35:13,839 Speaker 1: they are important players in the financing of the physical assets, right, 667 00:35:13,880 --> 00:35:17,520 Speaker 1: so they provide colorized lending to shipments of various commodities. 668 00:35:17,560 --> 00:35:19,919 Speaker 1: So that's one important piece. So they're very much linked 669 00:35:19,960 --> 00:35:22,840 Speaker 1: to the physical asset too, because they are crucial players 670 00:35:22,840 --> 00:35:25,640 Speaker 1: in the dri of this market, the deriv markets used 671 00:35:25,640 --> 00:35:28,719 Speaker 1: by producer as a dge, and so they play a 672 00:35:28,760 --> 00:35:31,360 Speaker 1: crucial role in the middle. Obviously there are banks involved 673 00:35:31,360 --> 00:35:33,800 Speaker 1: and so so they play a function that is important 674 00:35:33,840 --> 00:35:39,600 Speaker 1: for the smooth operational the market commodities, a global market um. 675 00:35:39,719 --> 00:35:42,640 Speaker 1: The financial the risk from a financial stability perspective one 676 00:35:42,680 --> 00:35:45,360 Speaker 1: that we quickly scored that they were not data and 677 00:35:45,400 --> 00:35:47,080 Speaker 1: so if you want to say, I'm gonna have a chart, 678 00:35:47,239 --> 00:35:49,960 Speaker 1: and I don't know what chart to show. Some of 679 00:35:50,000 --> 00:35:52,520 Speaker 1: these entities have publicly ready bonds, So that's what we 680 00:35:52,520 --> 00:35:55,840 Speaker 1: were showing. That was for US proxy of investor concern 681 00:35:56,400 --> 00:35:58,960 Speaker 1: about these firms. But that was pretty much it, right, 682 00:35:59,640 --> 00:36:03,200 Speaker 1: not stability into their leverage position, who they were playing, 683 00:36:03,320 --> 00:36:06,840 Speaker 1: what market that was huge and sense of opacity in 684 00:36:06,960 --> 00:36:09,880 Speaker 1: terms of where there is where that was the big question. 685 00:36:10,120 --> 00:36:12,560 Speaker 1: I think the big flag, right flag came up. So 686 00:36:12,600 --> 00:36:15,560 Speaker 1: we're trying to do better job going forward. I mean 687 00:36:15,600 --> 00:36:20,160 Speaker 1: the big gap again, it's data data, and honestly they're 688 00:36:20,160 --> 00:36:24,000 Speaker 1: not these is one to to have conversation with. Glencore 689 00:36:24,080 --> 00:36:26,239 Speaker 1: doesn't want to talk to you. I can't imagine they 690 00:36:26,280 --> 00:36:30,160 Speaker 1: see the easier conversation without people. Um. You know you 691 00:36:30,200 --> 00:36:34,319 Speaker 1: mentioned cross borders village risks earlier. And one of the 692 00:36:34,360 --> 00:36:37,200 Speaker 1: things that I've thought about and I've written about at 693 00:36:37,280 --> 00:36:41,279 Speaker 1: various times is the role of benchmark index providers in 694 00:36:41,440 --> 00:36:44,759 Speaker 1: directing inflows and outflows. And I think the I m 695 00:36:44,840 --> 00:36:47,000 Speaker 1: F has done some work on this too. But how 696 00:36:47,120 --> 00:36:49,480 Speaker 1: much of a risk is that just this idea that 697 00:36:49,520 --> 00:36:52,279 Speaker 1: you create a benchmark, everyone tries to hug it as 698 00:36:52,280 --> 00:36:54,800 Speaker 1: closely as possible, and if you get a major change 699 00:36:54,800 --> 00:36:57,960 Speaker 1: in the index, for instance of China is added or 700 00:36:58,360 --> 00:37:01,839 Speaker 1: taken out, it triggers all the flows. Okay, So again 701 00:37:01,880 --> 00:37:04,839 Speaker 1: there's positive. It's like everything right, opportunities and risks right. 702 00:37:04,840 --> 00:37:06,719 Speaker 1: So I think opportunity of being added to the risk. 703 00:37:06,760 --> 00:37:09,440 Speaker 1: It means the country opens up to capital flows. So 704 00:37:09,560 --> 00:37:13,000 Speaker 1: capital flows are important for growth, for financial transaction. So 705 00:37:13,120 --> 00:37:15,560 Speaker 1: that's the positive of coming with it. The risk are 706 00:37:15,719 --> 00:37:18,879 Speaker 1: that the behavior of passive investor of benchmark investors very 707 00:37:18,880 --> 00:37:21,839 Speaker 1: different from SAM dedicated funds right am dedicated fund It's 708 00:37:21,840 --> 00:37:24,160 Speaker 1: really about going in and picking that I count re 709 00:37:24,320 --> 00:37:26,920 Speaker 1: picking the right credit, doing more the credit work if 710 00:37:26,920 --> 00:37:30,760 Speaker 1: you want, or solign work. Benchmarking is just following index. 711 00:37:30,840 --> 00:37:34,600 Speaker 1: And what we found is that the behavior of investors 712 00:37:34,680 --> 00:37:39,520 Speaker 1: that just benchmarks are much more linked to global financial conditions. 713 00:37:39,560 --> 00:37:42,240 Speaker 1: So when financial condition change and they tire and globally 714 00:37:42,239 --> 00:37:44,759 Speaker 1: di guid tends to leave. And so by being in 715 00:37:44,800 --> 00:37:46,920 Speaker 1: the index, yes you get more cavial, but you are 716 00:37:47,080 --> 00:37:50,480 Speaker 1: much more exposive before if you want to the risk 717 00:37:50,520 --> 00:37:54,640 Speaker 1: capiti change of the global investor. That's the downside of 718 00:37:54,640 --> 00:37:57,640 Speaker 1: of being in the index. So that's where I think 719 00:37:57,680 --> 00:38:00,840 Speaker 1: then it's important for the local Now there's another oportunity. Actually, 720 00:38:01,360 --> 00:38:04,400 Speaker 1: they often tend to deepen the liquidity of the local markets, right, 721 00:38:04,400 --> 00:38:07,600 Speaker 1: so their benefits. That's where though the local regulator I 722 00:38:07,640 --> 00:38:09,319 Speaker 1: think they need to play a role in terms of 723 00:38:09,360 --> 00:38:12,640 Speaker 1: like regulation that it's appropriate for those kind of flows 724 00:38:12,680 --> 00:38:15,560 Speaker 1: because those investors are not the typical em didy get 725 00:38:15,600 --> 00:38:18,799 Speaker 1: investors that sticks there. Those are investors that moves with 726 00:38:18,960 --> 00:38:22,000 Speaker 1: global financialries capitalize and we have seen that over the 727 00:38:22,120 --> 00:38:24,160 Speaker 1: last past few years. I want to go back to 728 00:38:24,200 --> 00:38:26,279 Speaker 1: something you said there at the beginning that I found 729 00:38:26,320 --> 00:38:28,319 Speaker 1: to be really interesting, the idea of growth being a 730 00:38:28,360 --> 00:38:32,360 Speaker 1: precondition for financial stability. And often when I think about 731 00:38:32,719 --> 00:38:35,840 Speaker 1: central bankers around the world of regulators, it feels like 732 00:38:35,920 --> 00:38:38,239 Speaker 1: to me that like the sort of macro part of 733 00:38:38,239 --> 00:38:40,960 Speaker 1: their job and the regulatory part of their job, or 734 00:38:41,000 --> 00:38:43,920 Speaker 1: like two separate things, and that there's enough managing the 735 00:38:43,920 --> 00:38:46,560 Speaker 1: banks making sure this and then also like making sure 736 00:38:46,600 --> 00:38:49,880 Speaker 1: they hit their inflation and unemployment goals, etcetera. Isn't that 737 00:38:49,960 --> 00:38:53,160 Speaker 1: the case of my misperception? Or do like should central 738 00:38:53,160 --> 00:39:00,000 Speaker 1: bankers should regulators recognize the interlinkages between maintaining robust growth 739 00:39:00,000 --> 00:39:02,759 Speaker 1: said financial stabuilding more than they currently do. I think 740 00:39:02,760 --> 00:39:06,120 Speaker 1: of like the banking sector, right, the best ingredient for 741 00:39:06,200 --> 00:39:09,400 Speaker 1: success of banks growth right because they have healthy balance, 742 00:39:09,640 --> 00:39:13,359 Speaker 1: the PLT cabital position, liquidity position. So to me, if 743 00:39:13,400 --> 00:39:16,160 Speaker 1: without growth the system is much more fragile. The way 744 00:39:16,200 --> 00:39:19,120 Speaker 1: we think about financial stability in terms of our framework, 745 00:39:19,200 --> 00:39:22,960 Speaker 1: we take if you use financial conditions, we use economic 746 00:39:22,960 --> 00:39:25,960 Speaker 1: condition then we try to forecast what the distribution of 747 00:39:26,000 --> 00:39:28,200 Speaker 1: growth will be, right, and so we think about financial 748 00:39:28,239 --> 00:39:30,560 Speaker 1: stability of the left tail. If you're on the downside risk, 749 00:39:31,040 --> 00:39:33,680 Speaker 1: that's for us. The link between financial conditions would not 750 00:39:33,760 --> 00:39:36,680 Speaker 1: abil is and growth. What do what policy meg are 751 00:39:36,719 --> 00:39:38,920 Speaker 1: trying to do when they think about financial stabilitia, trying 752 00:39:38,960 --> 00:39:41,719 Speaker 1: to minimize the downside the tail. That's to me, it 753 00:39:41,800 --> 00:39:43,880 Speaker 1: is the link between growth and financials ablity. That's the 754 00:39:43,920 --> 00:39:47,000 Speaker 1: framework we use in the financial Ability Report. I have 755 00:39:47,200 --> 00:39:49,080 Speaker 1: just one more question, and I'm sure this is the 756 00:39:49,120 --> 00:39:52,279 Speaker 1: one you get asked at every interview, but what are 757 00:39:52,320 --> 00:39:56,239 Speaker 1: you most worried about at the moment. I think what 758 00:39:56,360 --> 00:40:01,200 Speaker 1: I'm most concerned now is this sense of comfort that 759 00:40:01,400 --> 00:40:05,840 Speaker 1: nothing is broken um and as evidenced by this interview 760 00:40:05,880 --> 00:40:08,800 Speaker 1: and many of our questions. But it is because I 761 00:40:09,239 --> 00:40:11,640 Speaker 1: am reluctant to embrace this idea that we made the 762 00:40:11,719 --> 00:40:14,480 Speaker 1: system more residient and this is work out smoothly. Maybe 763 00:40:14,480 --> 00:40:16,440 Speaker 1: it's the case, and then we should celebrate. I'm just 764 00:40:16,560 --> 00:40:20,320 Speaker 1: concerned that I don't know. The energy trading firm was 765 00:40:20,320 --> 00:40:22,400 Speaker 1: an example that there are corners of the system that 766 00:40:22,560 --> 00:40:25,880 Speaker 1: I've not paid enough attention. The coronover time that they 767 00:40:26,000 --> 00:40:29,440 Speaker 1: became systemic, either because of size or because they use 768 00:40:29,560 --> 00:40:32,359 Speaker 1: leverage informed that they're not apparent or I don't have data, 769 00:40:33,160 --> 00:40:35,800 Speaker 1: or I don't understand the dynamic. Right. So the l 770 00:40:35,880 --> 00:40:38,000 Speaker 1: d I was a good example. People knew about LDI. 771 00:40:38,160 --> 00:40:39,920 Speaker 1: This is not a new thing that was learned, right, 772 00:40:40,280 --> 00:40:43,960 Speaker 1: It just happened. The combination of that business model with 773 00:40:44,200 --> 00:40:47,040 Speaker 1: a liquid in the guild market, with the policy shock 774 00:40:47,160 --> 00:40:51,120 Speaker 1: that perhaps no one it was difficult to forecast. But 775 00:40:51,200 --> 00:40:53,919 Speaker 1: the combination will this fact or create a situation where 776 00:40:54,320 --> 00:40:57,440 Speaker 1: what was going on in the UK had tremors across 777 00:40:57,480 --> 00:41:00,400 Speaker 1: the globe, You have reprising or create risk in the US, 778 00:41:00,719 --> 00:41:04,040 Speaker 1: you're reprising all asset execurities in as far as Australia 779 00:41:04,080 --> 00:41:07,160 Speaker 1: because people were selling across asset. That's the part that's 780 00:41:07,160 --> 00:41:11,040 Speaker 1: concerned me on missing something and becoming too comfort in this. Okay, 781 00:41:11,080 --> 00:41:13,640 Speaker 1: we got the right matrix with the right vulnerabilities, their 782 00:41:13,719 --> 00:41:16,800 Speaker 1: right legal model, because a lot of these are created 783 00:41:16,840 --> 00:41:18,799 Speaker 1: with the lens of the past, right on the lens 784 00:41:18,840 --> 00:41:20,920 Speaker 1: of the last crisis, that crisis tends to be different. 785 00:41:21,680 --> 00:41:24,400 Speaker 1: So I'm reluctant to be too comfortable that we managed 786 00:41:24,440 --> 00:41:28,279 Speaker 1: to to handle financials to be it's good not to 787 00:41:28,320 --> 00:41:31,720 Speaker 1: be complacent if you're a financial stability person, the regular 788 00:41:32,000 --> 00:41:34,719 Speaker 1: financial they should should be a healthy paranoia. I think 789 00:41:34,719 --> 00:41:37,640 Speaker 1: it's also true that no one had, you know, liability 790 00:41:37,719 --> 00:41:42,280 Speaker 1: driven strategies on their Bingo card for two financial stability risks. 791 00:41:42,320 --> 00:41:45,759 Speaker 1: So that's a really good example. Shall we leave it there? Show? 792 00:41:46,840 --> 00:41:49,359 Speaker 1: All right? This has been another episode of the All 793 00:41:49,440 --> 00:41:52,239 Speaker 1: Thoughts podcast. I'm Tracy Alloway. You can follow me on 794 00:41:52,360 --> 00:41:54,840 Speaker 1: Twitter at Tracy Alloway and I'm Joey Isn't that You 795 00:41:54,880 --> 00:42:02,080 Speaker 1: can follow me on Twitter at the store. The Year 796 00:42:06,400 --> 00:42:06,440 Speaker 1: E