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12 November 2014

Financial Times: An imperfect plan for fixing the next crisis


In a serious crunch, it would be every bank regulator for itself, writes John Gapper.

After the spectacular chaos of the last time that regulators and governments scrambled to rescue banks in the US and Europe, they have hammered out a plan for the next time. It is better than the absence of one in 2008 but who knows if it will work?

The authorities can run all kinds of stress tests on the capital structures of the world’s largest banks, trying to predict how well they would bear losses in a future crisis. The stress test they really need to run is on themselves – whether they will stick to their promise to work nicely with each other or will revert to self-interest.

In a truly serious crisis – the kind that only tends to come along every few decades – I suspect it would still be every bank regulator for itself. That is not to rubbish the efforts of the Financial Stability Board, which this week unveiled a plan to deal with troubled banks. It is merely to point out a reality that no amount of goodwill can erase.

Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board that meets in Basel to plan such things, declared that the system had reached a “watershed” after years of regulators trying to fix the problem. Banks would have deeper reserves of capital, and officials would be better prepared.

But while central banks and regulators will have superior tools to rescue banks next time, they will have far less freedom of manoeuvre. In 2008, they could act first and face questions later. Next time, they will be under severe pressure – and in the US, a legal obligation – not to spend a penny of public money on the task.

Full article on Financial Times (subscription required)


© Financial Times


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