The subprime crisis and the subsequent failure of Lehman Brothers came as such a shock – and the repercussions were so severe that when the time came to mount a response, policy makers were as surprised as the rest of us and woefully unprepared.
In the six years since Lehman’s collapse, much effort has gone into thinking about the next crisis and about how to strengthen financial rules and practices so that the fallout is contained. Has this effort been productive? Will the repercussions of the next crisis be less damaging?
Another banking crisis?
The answer, as with many things economic, is: it depends. It depends in particular on the form the next crisis takes. Most obviously, that crisis could be sparked by the collapse of a large bank, similar to bank failures in the US and other countries in 2007 and 2008. Banks are highly leveraged, and information about their underlying condition can be difficult to obtain. This means that they are always at risk of going bust.