Modern financial markets need Pressure Valves

By Carey Evans, Co-Head of BlackRock EMEA Government Affairs & Public Policy

In the years following the 2008 Global Financial Crisis (GFC), regulators acted decisively to make the financial system safer. Banks were required to hold more capital, reduce leverage, and rely less on short-term funding. Central clearing and stricter collateral requirements were introduced, reducing counterparty risk across markets. By most measures, the system today is far more resilient than it was 15 years ago.

However, as we highlight in our recent paper, “Pressure Valves: Relieving Liquidity Stress in Capital Markets,” this progress has consequences come with a trade-off: risk has not disappeared — it has changed. The new focus for the debate on financial stability and market resilience needs to be on liquidity.

Coming out of the GFC, the primary concern for underpinning the resilience of the financial system was the solvency of key institutions (that is, minimising the risk of institutions failing), and improving system-wide management of counterparty risk. Today’s financial system, however, is more exposed to liquidity stress —situations in which market participants are fundamentally sound but need to access cash quickly to meet short-term obligations.

This change is largely structural. Financial markets are “hard-wired” to generate liquidity demand during periods of volatility. When asset prices move sharply, margin requirements rise. Investors must post additional collateral, often in cash, and must do so at speed. The challenge is that these demands are highly synchronised—many participants need liquidity at the same time.

At the same time, the traditional shock absorbers of the system—banks—are less able to intervene. Post-crisis regulations constrain their ability to use balance sheets for market-making and short-term funding.

As a result, just as demand for liquidity surges, the system’s capacity to supply it, store it, and move it is limited: liquidity demand can exceed supply precisely when it is needed most.

A clear example of this dynamic was the market turbulence during the COVID-19 shock in March 2020. As volatility surged across financial markets, investors faced sharp increases in margin calls and collateral requirements. Although many institutions remained fundamentally solvent, they were required to raise cash to meet these liquidity demands, often by selling assets into already stressed markets.¹

Rather than advocating a rollback of post-GFC regulation or trying to get ahead of market stress by forcing investors to hold more cash – which can be costly and inefficient – we propose a more targeted solution: the introduction of “Pressure Valves”. These are mechanisms designed to improve the way liquidity moves through the financial system during periods of stress without undermining the resilience achieved since the GFC:

• Improve collateral mobility and usability: Enhance the ability to move and reuse collateral efficiently across the system, reducing bottlenecks during periods of stress.
• Strengthen repo market resilience: Ensure more reliable access to short-term funding, particularly during stress events and around reporting dates such as quarter-end.
• Invest in market infrastructure and technology: Upgrade systems to enable faster, more efficient movement of liquidity and collateral across participants.

The key takeaway is clear: today’s financial risks are more about how markets function under stress than about institutions failing. Addressing this requires not only strong regulation, but also better “plumbing”—the mechanisms that keep liquidity flowing when it matters most.

¹European Systemic Risk Board, Liquidity risks arising from margin calls, June 2020.

Disclaimer

This content represents the regulatory and public policy views of BlackRock. The opinions expressed herein are as of May 2026 and are subject to change at any time due to changes in the market, the economic or regulatory environment or for other reasons. The information herein should not be construed as marketing material, research or relied upon in making investment decisions with respect to a specific company or security.