The global financial system is not prepared to deal with the next systemic financial crisis.
That’s one of the key conclusions of a report, Managing the Next Financial Crisis, produced by the Group of 30, an independent, nonprofit international body with representatives from government, business and academia.
The report, developed by a committee that includes former Treasury Secretary Timothy Geithner; Guillermo Ortiz, former governor of Mexico’s central bank; Alex Weber, former president of Deutsche Bundesbank; and former Federal Reserve Board Chair Janet Yellen, delivers a mixed assessment of readiness.
The global financial system is now better prepared than before the last crisis to address failures of individual institutions and modest shocks to the system, as a result of reforms in government regulations and bank practices, but it has less flexibility to address a systemic crisis, according to the report.
“Emergency powers have been weakened” through legislation and “an erosion of political capital” to use those powers, the report notes, citing among other developments Dodd-Frank, which limits such interventions Federal Reserve’s credit facility for AIG used in the last crisis, as well as other legislative and regulatory changes in the U.S. and abroad.
In addition, just like before the last crisis, the U.S. lacks standing facilities to provide emergency liquidity to nonbank institutions, and the global financial system has no formal structure for an international lender of last resort, leaving the Fed the most likely candidate.
“Many parts of the shadow banking system remain vulnerable, including components that caused major problems during the [global financial crisis] such as securitization, bilateral repo and commercial paper,” the report notes.