If products could not deliver the prospectus-promised returns, in such a vicious circle event investment bank balance sheets would have to cover losses. This is a major area of policy interest. Investment banks and hedge funds both need to be encouraged to stress test their portfolios for an event like this, allowing for worst-case knock-on effects. If the size of position closures required is a large proportion of daily trading volume, a severe liquidity crisis could emerge. Investment banks in particular need to ensure that their capital remains sufficient to cover such a contingency. .
