“The banking system has improved enormously since 2007-09,” the law professor argues in a guest essay for The Economist. “Today’s supply-chain problems suggest it is time for companies and regulators to start catching up”
of a global recession is growing and inflation is already taking a significant toll. A prolonged period of stagflation—that painful combination of high inflation and low growth—looks increasingly probable even if a global recession is averted. The pandemic and Russia’s invasion of Ukraine triggered the problems now on display.
One change that has improved risk management and resilience in the banking sector is cutting back on costly complexity. Lending and borrowing will never return to the simplicity of the 1950s, when money flowed from depositors to banks to borrowers. But the past decade has seen a meaningful rebalancing. Layered securitisation vehicles are largely a thing of the past. The amount of asset-backed commercial paper outstanding has declined from over $1.
A second lesson is that well designed data standards can help firms and policymakers better understand and manage risk exposures. When Lehman Brothers failed, for example, the dysfunction that followed was magnified by a dearth of good information about just who was exposed and by how much. Lacking credible information, banks refused to trust one another, increasing the magnitude of the crisis that followed.
The final lesson from finance is the value of “stress testing”—trying to work out just how a firm would fare in an adverse scenario before anything bad actually happens.
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