Walk into an emerging market (EM) central bank office today and you will find a generation of professionals who are highly informed and capable but have never truly witnessed markets fail. They have observed volatility, drawdowns and policy intervention, but not the kind of systemic stress that permanently alters how the world prices risk. This is not their fault. It reflects the environment they inherited.
Compression of Trust
Historically, global financial markets evolved slowly because trust required time to develop. Asset classes matured over long time horizons as market depth, legal frameworks and investor confidence gradually took hold. For example, sovereign bonds, the foundation of modern finance, date back to the 1600s and required nearly three centuries to earn the credibility now taken for granted.
As industrial finance expanded, trust began to shift from sovereign issuers to regulated institutions. Investment-grade corporate bonds, introduced in the 19th century, took close to a hundred years, supported by the rise of credit ratings, clearing systems and pension regulation, to become institutional mainstays. The same pattern held for municipal and supranational bonds, which developed alongside the growth of public infrastructure and postwar multilateral lending. Even money-market instruments, now regarded as virtually risk-free, required decades of market learning before becoming dependable tools for liquidity management.
By the late 20th century, financial innovation began to accelerate. Mortgage-backed securities introduced in the 1970s gained mainstream adoption by the 1990s, while EM debt, revived under the Brady Plan of 1989, followed a similar trajectory. Inflation-linked bonds, high-yield debt and bank loans also broadened the investable universe, each shortening the time required for market acceptance.
The post-2008 global financial crisis (GFC) era transformed that pattern entirely. Private credit, virtually non-existent before the GFC, evolved into a trillion-dollar market in less than 15 years. Green, social and sustainability-linked bonds reached global scale in under a decade, driven by policy alignment and investor demand for purpose-linked capital. Even more striking, tokenized bonds and on-chain debt markets are achieving institutional relevance within years rather than decades.
Across this arc of financial evolution, what once required centuries of validation now unfolds within a single market cycle. Liquidity, regulation and technology have dramatically shortened the timeline for trust formation. Yet this compression also carries risk. As markets evolve faster than the institutional memory and safeguards that once anchored them, the durability of trust becomes more fragile.
Exhibit 1 illustrates this collapse in maturation time. Over four centuries, the period required for new asset classes to achieve institutional credibility has fallen from centuries to decades, and now to just years. Early markets relied on repeated proof of solvency and state backing, while modern ones depend on liquidity, modeling and perceived policy support. The bottom line is that the current generation faces the most compressed trust horizon in financial history, where confidence can form quickly but dissolve just as fast.
Revisiting this evolution is especially relevant for EM reserve managers. The next generation of leaders faces a far more complex market structure and must make allocation decisions that advance traditional objectives without sacrificing institutional resilience. As noted in our recent blog post, Before the Storm—Pilot Testing the Future of EM Reserve Management, EM reserve managers should remain clear on what they are solving for, be prudent in expanding their eligible asset pool and pilot test new instruments before integrating them into a broader reserve strategy.
Heed the Lessons of the Past
In the decades preceding the GFC, financial shocks were both frequent and instructive. Each episode forced investors and policymakers to confront the limits of leverage, liquidity and confidence. In 1994, a surprise tightening of US monetary policy triggered a global bond selloff. Soon after came the Mexican “Tequila Crisis” of 1994–1995, which reverberated across Latin America. The Asian Financial Crisis of 1997 exposed the fragility of fixed exchange-rate regimes financed by short-term foreign borrowing. The Russian default and the collapse of Long-Term Capital Management in 1998 revealed the extent of global interdependence and the speed at which contagion could spread. These crises arrived every few years and served as repeated reminders that liquidity is ephemeral and that, when confidence erodes, even the safest assets can become illiquid.
Since 2008, that rhythm has changed. Large-scale interventions prevented episodes such as the euro-area sovereign crisis, the 2013 taper tantrum and the 2020 pandemic shock from becoming systemic breakdowns. What began as temporary emergency support has evolved into an implicit assumption of liquidity insurance, with central banks acting as both the last line of defense and the first line of offense. This is problematic for three key reasons: first, a generation of market participants has grown accustomed to the idea that policy will ultimately stabilize the system; second, markets have expanded faster than the institutional and regulatory frameworks designed to oversee them; and third, liquidity, once intended as a stabilizing instrument, now compresses not only yields but also time, encouraging investors to commit capital to assets that have never faced a sustained period of stress.
For reserve managers, the implications are clear. Every asset in a portfolio, regardless of form, rests on trust: trust that obligations will be honored, that markets will function under stress and that policy frameworks will remain credible. But trust is not a permanent attribute. It is a form of institutional capital that must be earned and renewed through sound policy, transparency and consistent supervision. When those pillars weaken, confidence deteriorates, often more rapidly than fundamentals.
For professionals whose experience has been shaped by the post-GFC environment, these realities are not theoretical; they define the world in which reserves are managed today. Portfolios operate in markets where liquidity can vanish abruptly and where innovation can obscure leverage, maturity transformation and counterparty exposure. With this in mind, several enduring principles follow:
1. Understand historical context. Every asset class carries the imprint of a crisis. Studying how markets evolved, and how they failed, reveals behavioral patterns that reappear under stress. Mentorship is central to this process. Learning from those who navigated earlier episodes offers insights that cannot be replicated through data or simulation alone.
2. Beware of illusions. Years of policy success across the developed world have cultivated the perception that intervention is costless and unbounded. Yet institutions created to preserve trust can, paradoxically, weaken it when they suppress the feedback mechanisms that discipline behavior. The absence of volatility should never be mistaken for stability.
3. Challenge consensus. Assets considered universally safe often accumulate hidden vulnerabilities precisely because they escape scrutiny. Maintain analytical distance from prevailing narratives and resist the comfort of consensus and conformity.
4. Understand market structure. Yield differentials matter less than knowing how liquidity is created, distributed and withdrawn. Risk resides not only in credit quality but in the funding chains and collateral networks that connect institutions. What appears diversified may in fact be circular, as a failed redemption or collateral call can cascade rapidly through shared exposures. In today’s markets, risk rarely disappears; it migrates.
5. Respect liquidity risk. Market depth can vanish when correlations rise and funding tightens. Planning for discontinuity is essential. What began as a balance-sheet-based system has evolved into a complex web of intermediaries, collateral flows and derivative exposures that few fully understand until one or more components of the web fractures. Each wave of innovation, from securitization and derivatives to private credit and now tokenized assets, has increased both market reach and fragility.
6. Preserve credibility. The objective of reserve management is not the pursuit of maximum return but the preservation of confidence in the institution and, by extension, in the currency and sovereign itself. Credibility, once eroded, is slow to rebuild and costly to regain.
As senior policymakers and reserve managers retire or depart, the memory of how to manage crises in real time could steadily fade. Playbooks remain, but experience cannot be codified. Those who endured earlier disruptions learned first-hand through the experience of uncertainty, pressure and consequence—lessons that cannot be conveyed through manuals alone. The power of today’s technology and analytics may be able to simulate historical events and design complex risk scenarios, but they cannot substitute for judgment. Data records outcomes, but experience provides understanding.
For today’s reserve managers, preserving that historical awareness and transmitting it to the next generation is not an act of nostalgia. It is the foundation of institutional resilience and an essential component of sound risk management.
