That’s the matter of my latest Bloomberg column, right here is one piece of it:
For one more, an effort to make banks safer can successfully push danger into different sectors of finance. It might transfer into cash market funds, industrial credit score lenders, fintech, insurance coverage firms, commerce credit score, and elsewhere. These establishments are typically much less regulated than are banks and don’t have the identical type of direct entry to the Federal Reserve’s discount window.
That is no mere hypothetical: Within the 2008 disaster there have been main issues with each cash market funds and insurance coverage firms.
There’s a temptation, in gentle of current occasions, to significantly stiffen financial institution capital necessities — to lift them to, say, 40%. Once more, that will make banks safer, however it might not essentially make the monetary system as a complete safer.
And so policymakers permit banks to proceed alongside their doubtlessly precarious path. No matter their causes, the very fact stays that financial institution rules can get solely so powerful earlier than monetary danger begins spreading to different, presumably extra harmful, corners of the system.
Throughout the 2008 monetary disaster, for instance, there was an extra focus of derivatives exercise in AIG, later necessitating a bailout. Monetary derivatives acquired a nasty title in lots of quarters, and authorities securities had been considered as a protected haven. With Silicon Valley Financial institution, the issue was the inverse: Its portfolio was insufficiently hedged with derivatives and interest-rate swaps, leaving it susceptible to main swings in rates of interest. It ought to have used derivatives extra.
It’s simple sufficient to say, “We are able to write rules so this gained’t occur once more.” However these rules gained’t stop new sorts of errors from occurring.