Fed in Worse Shape to Combat Crisis Than 10 Years Ago, G-30 Says


(Bloomberg) -- The wide-ranging reforms put in place after the global financial crisis a decade ago have left central banks in worse shape to combat another international conflagration or an all-out cyber attack on banks.

That’s a surprising conclusion from a report by the Group of 30, an influential forum of current and former policy makers and academics that includes European Central Bank President Mario Draghi and Bank of England Governor Mark Carney.

“Some of the tools to fight the hopefully rare but extreme crises in the future have been weakened,” Timothy Geithner, co-chair of the G-30 working group that put together the report and a former U.S. Treasury secretary, told reporters.

“This is especially true in the U.S.,” where Congress limited the ability of the Federal Reserve and the Federal Deposit Insurance Corp. to provide emergency support to the financial system, added Geithner, now the president of Warburg Pincus LLC.

That’s important because the next catastrophe probably will look different than the last one, putting a premium on flexibility to respond to the fresh threats it will pose.

‘New Source’

“The next financial crisis will likely come from a new source,” said Guillermo Ortiz, former head of Mexico’s central bank and co-chair of the G-30 working group. He pointed in particular to the danger of a cyber attack.

Ortiz also voiced concern that policy makers might not be doing enough to anticipate the next financial emergency. “Central banks and supervisors may not be placing enough emphasis on preparing” for the inevitable calamity that will occur, he said.

It’s not all bad news, according to the report. The post-crisis reforms have greatly strengthened the core banking system and enhanced the ability of governments to wind down failing institutions without having to bail them out with public money. Banking supervisors from major countries also are working much more closely with each other, said UBS Group AG Chair and G-30 member Axel Weber.

“The prudential safeguards put in place since the global financial crisis represent substantial progress in creating more resilient and stable financial systems in the major economies,” the G-30 report said.

Shadow Banks

The result, Geithner said, is that policy makers are better able to deal with the failure of individual institutions and modest shocks to the financial system than they were a decade ago.

But even in that regard, there are downsides. Most of the post-crisis regulations are directed at the banks, encouraging risk-taking to move to the less supervised shadow system.

“If you apply constraints on risk taking to only part of the financial system -- say just the banks -- and allow other types of financial institutions to operate outside those constraints then you will leave the overall financial system less resilient,” Geithner said. “Banks themselves may look more stable but their role in the system will shrink over time.”

Weber said he’s worried that the cooperation built up among global regulators after the crisis may not survive another 10 years “in a world where inward-looking policies are starting to emerge, and where economic and trade tensions are starting to become the day-to-day in politics.”

©2018 Bloomberg L.P.

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