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What Dangers Lurk for the Financial System?

Paul Tucker was one of the key players at the Bank of England during the financial crisis of 2008-09. He says that the actions of policymakers and regulators since that time have built a more resilient financial system. But he also sees big challenges ahead that will require regulators to be more nimble and flexible than they’ve ever been before.


The story of the 2008-09 financial crisis can sound more like a horror movie than a discussion of economics: a small band of men and women fighting off an unprecedented threat that could end up devastating society if left unchecked.

Paul Tucker was one of the key actors at the Bank of England throughout the crisis, being named deputy governor for financial stability in 2009 after a long career at the bank. In the horror movie analogy, he is one of the people in the cabin while the unknown monster paces outside. Tucker says that the "scariest period" was between October 2008 and March 2009, after the Federal Reserve, the European Central Bank, and other central banks moved dramatically to inject liquidity into the system. Says Tucker, "The authorities used their blunderbuss, their bazooka. The authorities internationally decided to put their fiscal authorities behind the capitalization of the banks—a desperate move but an immensely powerful move. And yet as we went into November, December, into January and February, the system was still wobbling…. That was the scariest period because no one knew what would work. Once you've played your biggest card, there isn't much more you can do."

This uncertainty at the nadir of the crisis points to how hard it is to fully understand the state of the financial system at any given moment. It is an immense, interconnected web stretching over hundreds of countries-and it is always evolving. "Finance is a shape-shifter," says Tucker.

Tucker argues that a number of the actions taken by regulators and policymakers since 2008 have led to improvements in the state of financial stability. "We're probably better off than we were a few years ago. A lot of resilience has been built since the terrible days of 2008-2009." He highlights the use of stress tests to assess how banks are likely to perform in adverse scenarios and efforts to create resolution authority for systemic firms in order to avoid the "too big to fail" trap.

What dangers still lurk ahead? Potential pitfalls, Tucker says, include the "search for yield" and ongoing tensions in the Eurozone, but he also points to the unforeseeable consequences of trying to impose stability and predictability on a shape-shifter. "The more you re-regulate banks, the more you can be sure that risky activity is going to move elsewhere. That presents a really big challenge to authorities, because that requires them to be nimble and flexible. And yet what society has traditionally wanted is a rule book." That means there is no silver bullet, so to speak, for regulators. "We've got to get to a position where the regulatory authorities have more discretion, but restrained discretion, and that debate has hardly got going yet. The world won't be a safe place until that debate has occurred and a more flexible but disciplined regime has been put in place."

Former Deputy Governor for Financial Stability, Bank of England; Senior Fellow, Harvard Business School