Owatonna, Minnesota Correspondent — The post-2008 reforms improved capital and liquidity standards at large banks and brought more of the system under supervision. That was real.
They didn’t eliminate leverage, maturity mismatch, or the tendency of risk to migrate toward whichever entity is regulated differently.
The next serious recession will test whether the remaining gaps are large enough to recreate systemic stress. Having spent years as a planner, I’d say the gap I’d watch isn’t a balance sheet item. It’s the political willingness to impose losses, which was never restored and has never been tested since.
Dayton, Ohio Correspondent — Higher capital requirements and better resolution planning at the largest banks were genuine progress.
Risk moves toward the less regulated parts of the system. Leverage and liquidity mismatch still exist outside the traditional perimeter.
A deep recession will expose places where the reforms were incomplete or where new interconnection was underappreciated. Whether those prove systemic depends on the severity of the shock and the speed of the response.
Sydney, Australia Correspondent — Higher bank capital helped. Risk migrating to less regulated channels remains the concern.
Australia’s experience is instructive and a little uncomfortable. We didn’t have a banking crisis in 2008, which meant we didn’t reform much, which means our exposure now is household debt against housing rather than anything exotic.
The lesson I’d draw is that avoiding one crisis doesn’t confer immunity. It confers complacency, and complacency accumulates in whichever direction nobody is looking.
Bismarck, North Dakota Correspondent — Some reforms helped. The next real recession will show what was missed, particularly outside traditional banks.
Out here the visible effect of the last decade was consolidation. We lost community banks, and the ones that remain deal with a compliance burden written for institutions a thousand times their size.
Whether that made the system safer is a fair question. It certainly made it more concentrated, and concentration was supposed to be the thing we were worried about.
Tyler, Texas Correspondent — Some of the post-2008 work made the large banks thicker. Some of it made community lenders thinner and pushed risk into corners that don’t file the same forms.
A recession will show both.
Insufficient to prevent systemic risk? Insufficient to prevent the next shape of it. Risk moved. It didn’t retire.
I want capital where the risk lives now, not only where it lived in 2007. And I’d retire the argument that a rulebook must be working because it’s long. Length isn’t strength.
Las Vegas, Nevada Correspondent — 2008 here wasn’t a seminar. It was rooms that went dark and projects that stopped at dirt, and some of that dirt sat for six years.
Reforms that only address the logo banks will miss leverage that grew in funds, in rolling paper, in whatever chain looks safe because it’s new.
Recessions are honest. The question is whether we use the honesty to fight the last war or to look at the books that grew while we were congratulating ourselves.
Knoxville, Tennessee Correspondent — Systemic risk is a chain, and chains move.
Post-2008 put locks on some doors and left an alley open. A downturn will walk the alley.
Map it now — nonbanks, liquidity assumptions, the collateral everybody believes they can sell at the same time. An examination that only sees 2007 will flatter itself right up to the week it matters.
Long Island, New York Correspondent — Mortgage files taught me that never again is a toast. Toasts don’t underwrite.
The reforms lowered some leverage and created other incentives — fewer small lenders, more concentration, more activity where the rule is softer.
The next recession won’t copy the last one. It’ll find the soft rule. Assume that, and review the soft rule before it arrives, because that’s the only use of 2008 that still pays. The rest is an anniversary.
