Taking Systemic Risk Seriously

WASHINGTON, DC – There are two leading views about the world’s financial system. The first, heard mostly from executives at leading global banks and their allies, is that the system is safer than it has ever been. According to this view, the events that led up to the global financial crisis that erupted in 2008 cannot happen again; the reform process has succeeded.

By contrast, a growing group of current and former officials continues to express concern about current and potential future risks in the United States, Europe, and globally. US Treasury Secretary Jack Lew made such an argument in a recent congressional testimony, in the context of explaining why the Financial Stability Oversight Council (FSOC) should be allowed to consider whether any kind of firm or activity could pose a risk to the broader system.

And a striking new voice has joined the fray – Kara Stein, a commissioner at the Securities and Exchange Commission (SEC). Stein delivered a far-reaching speech in June, in which she argued that systemic risk must become a more central responsibility for financial-market regulators.

Systemic risk refers to problems that spill across different kinds of firms and markets, often in unexpected ways and sometimes very quickly. Perhaps the most prominent example from 2008 is the way that the failure of the investment bank Lehman Brothers risked brining about the imminent collapse of the insurer AIG, while also leading to intense pressure on money-market mutual funds.