At the same time as the US authorities were considering the fate of Lehman Brothers - it was allowed to fail - they were contemplating what to do about AIG, a potentially much bigger problem. AIG, a US insurance company, had focused on providing default insurance for holders of Collateralised Debt Obligations (CDOs), which were at the epicentre of the global financial crisis. CDOs were packages of debt obligations, made up in large part of US mortgages. AIG sold derivative products known as credit default swaps to investors, including some of the world's largest investment banks. These were supposed to pay out if the underlying CDOs defaulted.  But when foreclosures of the defaulted US sub-prime mortgage market started to increase, AIG lacked the capacity to pay out as promised - threatening the stability of the global financial system. As a result the US authorities stepped in to bail it out.

Derivatives bought and sold by investment banks played an important role as accelerants of the devolvement of the global financial crisis, but are they all inherently bad? The Roman Catholic Church seems to think so. Its recent reporton the ethical underpinnings of the global financial markets questioned the morality of Credit Detail Swaps (CDS), describing them as a kind of ?economic cannibalism?.

In my view not all capital markets activities, like derivatives, are inherently evil. They can be used to hedge risk; for instance, an airline can protect itself against unexpected increases in the price of jet fuel or a food manufacturer from changes in sugar prices, or a bank can protect itself against the interest rate risk in its banking book that arises as it redeploys the short-term deposits it takes into longer-term loans.

But it cannot be denied that CDS outstandings grew from less than $10 trillion in 2004 to almost $60 trillion in 2008. Many of these will not have been used to hedge underlying exposures but as trading instruments that effectively, as the Vatican report suggested, allowed the holder to bet on the failure of a borrower.

Before the global financial crisis regulators allowed banks to hold less capital against their trading book exposures than against their traditional loans. This was based on the Mark-to-Market (MTM) valuation of a derivative or securitisation, based on the premise that its price would evolve in a predictable way based on previous price history. The global financial crisis gave the lie to this assumption, which was based on the theory of rational and efficient markets. Instead psittacine flock mentality took over and MTM values fell by many times more than quantitative models of trading risk implied, causing trading book capital requirements to sky-rocket.

Responding to this unexpected volatility, regulators have significantly increased trading book capital requirements, which has had a corresponding impact on trading book exposures. A recent World Bank report showed that the gross market value of outstanding derivatives contracts fell to $11 trillion at the end of 2017 and has been on a downward trend since the financial crisis.

Far from killing the derivative markets, regulators have reassessed capital requirements for derivatives in light of the experience gained during the global financial crisis. As a result, the global financial system is more resilient to volatile derivative markets than it was, but can still facilitate the ?price discovery? mechanism and fulfil the economically useful function of transferring risks between capital market participants, to the benefit of banks, their customers and society more generally.