Since last summer, we have lived through a severe and complex financial crisis. Why was the financial system so fragile? What can be done to make the system more resilient in the future?

The world experienced a financial boom. The boom fed demand for risk. Products were created to meet that demand, including risky, complicated mortgages. Many assets were financed with significant leverage and liquidity risk and many of the world’s largest financial institutions got themselves too exposed to the risk of a global downturn. The amount of long-term illiquid assets financed with short-term liabilities made the system vulnerable to a classic type of run. As concern about risk increased, investors pulled back, triggering a self-reinforcing cycle of forced liquidation of assets, higher margin requirements, increased volatility.