Two of the country’s largest banks collapse.  The subsequent panic brings the banking system to its knees and only a costly government bail-out prevents even greater catastrophe.  A radical re-think of regulation is needed.  No, it’s not London or New York in 2008.  It is Berlin in the 1930s.  It’s when risk-weighted capital regulation was born, notably to be used alongside a range of other tools; for example, liquidity requirements and such modern ideas as bonus deferrals and capital conservation.  But the idea that no single regulatory measure is likely to be sufficient on its own was forgotten.  In 2008 it had to be painfully re-learned making this episode a striking example of the importance of studying past financial crises.

From Berlin to Basel: what can 1930s Germany teach us about banking regulation? | Bank Underground

Specifically, the recommendations were: “shadow banks should be subject to the same limits on risk-taking as banks,” “shadow banks should be subject to the same capital standards as banks,” and “[s]tress test liquidity positions.” These were the central ideas for me then, and they are central ideas for me now. (Given how the liquidity stress tests have become one of the central attacks against Dodd-Frank, with whisper campaigns about how the LCR is causing “bond market liquidity,” I think we were on the right track.)

Why I (Still) Think Shadow Banking is Key to Financial Reform - Roosevelt Institute

These policy tools have not been used systemically in the past, so their impact and the FPC’s reaction function remain unclear. Moreover, in contrast to monetary policy, where price stability can be judged against inflation, the objective of macroprudential policymakers – the stability of the financial system – is inherently unobservable. Thus macroprudential policymakers face a high degree of uncertainty over the impact and effectiveness of their tools and a target variable they cannot perfectly observe.

Uncertainty is no excuse for not using macroprudential tools | Bank Underground

I’ve been on record since early days saying that too-big-to-fail is not the key issue, so that the fact that big banks remain big is, um, no big deal. The real question — or so I’d argue — is leverage within the financial sector, and in particular the kind of leverage with no safety net that characterizes shadow banking. So Matt O’Brien weighs in with evidence that leverage has in fact declined substantially, and continued to decline even as the economy expanded — probably because of Dodd-Frank. This is certainly right; the same decline shows up in other measures, as in the chart above showing financial sector debt securities as a percentage of GDP.

Half a loaf, financial reform edition  - The New York Times

Bad loans are twice as big a problem for European banks as they are for banks in the US — despite lenders’ many efforts to clean up balance sheets in troubled eurozone hotspots such as Spain, Ireland to Greece. New official figures show that almost 6 per cent of European banks’ entire loan books are impaired, double the impairment rate of 3 per cent in the US. Bad loans remaining on the books of Europe’s banks are almost as big as the gross domestic product of Spain.

Bad loans at Europe banks double that of the US - FT.com

HSBC matters. Regulators judge it to be the world’s most important bank, alongside JPMorgan Chase. A tenth of global trade passes through its systems and it has deep links with Asia. (Simon Robertson, a director of the bank, is also on the board of The Economist Group.) Its record has blemishes—most notably, weak money-laundering controls in Mexico. But it has never been bailed out; indeed, it supplied liquidity to the financial system in 2008-09. It is organised in self-reliant silos, a structure regulators now say is best practice.

Asian dissuasion | The Economist

Empirical cross-country panel analysis shows that, overall, macroprudential usage has significant mitigating effects on credit developments: a one standard deviation change in the macroprudential index – a change of 1.5, which is large relative to the mean of 1.8 – reduces credit growth by some 11 percentage points.

The use and effectiveness of macroprudential policies: New evidence | VOX, CEPR’s Policy Portal

Should banks be nationalized to protect shareholders? What I mean is that banks are risk-magnifiers. When they lose money, credit to the whole economy gets choked off, thus causing recession. Banks are critical hubs in a network economy. Put it this way. In the 2008 financial crisis, the US’s biggest financial institutions lost between them less than $150bn. But during the tech crash of 2000-03 investors in US stocks lost over $5 trillion. The former led to a great depression, the latter to only the mildest of downturns. Why the difference? One big reason is that losses are easier to bear if they are spread across millions of (mostly unleveraged) people, but cause real trouble if they are concentrated in a few leveraged strategically important institutions.

Stumbling and Mumbling: Should we nationalize banks?

The financial system, King reveals, is still wired so that a handful of well-connected people capture the benefits from risk-taking while the entire society bears the cost. Complexity was once used to disguise the risk in the financial system. Now it’s being used to disguise how little has actually been done to fix that system.

The Book That Will Save Banking From Itself - Bloomberg View

The latest progress reports from the Financial Stability Board (FSB) in Basel outline definite improvements in stability-enhancing financial regulations in 24 of the world’s largest economies. Their “Dashboard” tabulates progress in 14 different regulatory areas. For example, the FSB gives high marks for all 24 countries in implementing the Basel III risk-based capital requirements.

Fighting the next global financial crisis instead of the last one - MarketWatch

Take the slow recovery in the real estate market. Some of the weak housing demand is due to high student debt and slow rates of household formation, but tighter regulations on mortgage lending also have held it back. Evidence of this comes in a recent paper by Francesco D’Acunto and Alberto G. Rossi at the University of Maryland Business School, who show that the lending regulations of Dodd-Frank redistributed credit away from the middle class toward wealthier Americans. After adjusting for economic conditions, mortgage credit to the middle class went down by 15 percent. It went up 21 percent for wealthy households. Mortgage credit also has been tight for poorer borrowers, in part through the deliberate intent of the law. It seems we shot ourselves in the foot by slowing down an already lagging economic recovery.

Let's Think Again About Dodd-Frank - Bloomberg View

The president-elect’s transition team has already vowed to dismantle the Dodd-Frank Act, the main financial regulation enacted in the wake of the 2008 crisis. A major part of that would be reducing the authority of the Consumer Financial Protection Bureau, created mainly to shield the public from exploitative lending practices. The Department of Labor’s fiduciary rule, which would require financial advisers to put customer interests ahead of their own, is also under threat. This has all been very good news for financial companies, especially the big banks that were the main target of the reforms.

What Trump Didn't Learn From the Financial Crisis - Bloomberg View

Where will the next crisis come from?  Every crisis starts with a pile of debt that can't be paid back, and shady accounting to hide that debt. When one big one goes under, everybody starts to question the shady deals they've invested in, the extend-and-pretend game ends, heretofore simple rolling over of short term debt suddenly ends, and the run starts. Governments bail out. Really big crises happen when governments run out of bailout power or will and you have a sovereign debt crisis or inflation.

The Grumpy Economist: The next crisis?

The UK's banks should no longer be "too big to fail", under revised rules announced by the Bank of England. The regulations will force banks to hold enough money from their investors to absorb losses without help from the taxpayer. If any bank does face collapse, the funds will be spent to finance an orderly wind-down. The Bank's governor, Mark Carney, said the new rules were a "significant milestone". "The implementation of [the rules] will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds, and whilst allowing households and businesses to continue to access the services they need," he said.

Taxpayer bailouts for banks 'too big to fail' to end by 2022 - BBC News

Timothy Massad, the outgoing chairman of the Commodity Futures Trading Commission, warned the incoming Donald Trump administration against rolling back postcrisis financial regulation. “My belief is that to repeal or dismantle the reforms we have implemented would be a major mistake,” Massad said Tuesday during a speech at the London School of Economics. “Their repeal would not contribute to improving the economic conditions that might have given rise to populist discontent expressed in recent elections.” Financial overhauls introduced after the financial crisis, such as the 2010 Dodd-Frank Act, could however be improved upon, he said.

Don’t repeal financial reforms, outgoing CFTC chief warns - MarketWatch

And former chief economist of the IMF, Simon Johnson:

House Republicans are dead set on repealing financial regulation—rolling back the rules to what they were before 2008. Excessive financial deregulation leads to a predictable cycle of boom-bust-bailout, in which rich people do very well, and millions of people lose their jobs, their homes, and their futures. During the last crisis, presumptive Treasury Secretary Mnuchin bought IndyMac, a distressed bank, receiving a great deal of help from the government—and then sold it at a large profit. At the same time, millions of Americans lost everything in the housing crash and their appeals for assistance of any kind fell on deaf ears. In fact, appeals for the reasonable restructuring of loans made by IndyMac were apparently also turned down; this lender has a reputation as ruthless (and careless) in its foreclosure practices. If the Treasury Department ends up being headed by someone who gains from economic volatility, how careful would officials really want to be?

Trump himself spoke of the housing crisis as a great opportunity—for him, that is. Rich and powerful people often do well from extreme booms and busts; most Americans do not. Deregulating finance is always sold with the claim that it will boost growth, and in the short run perhaps the headline numbers will improve—but only because we do not measure the economy with any regard for macroeconomic risk. If we had risk-adjusted employment and output (and corporate profits) during the George W. Bush years, we would have realized that economic expansion was based on unsustainable risk-taking in the financial sector—manifest in the crisis of September 2008 and the deepest recession since the Great Depression. In the House Republican mantra, honed over six years of refusing to cooperate with President Barack Obama, financial deregulation did not contribute to the meltdown of 2008. These congressional representatives fervently believe that growth has been slow because of a supposedly high burden of regulation on business—despite the fact that the United States is one of the easiest places in the world to do business.

The Folly of Trumponomics