“Is this a Lehman moment?”
In the days after the U.K. Brexit referendum, that was the leading question many people were asking. It is the right question. Unfortunately, despite years of regulatory reform in the aftermath of the financial crisis, the answer is: we don’t know. That is why policymakers are especially worried about heightened financial volatility in the aftermath of U.K. voters’ decision to leave the European Union....
Read MoreA highly leveraged financial system is one prone to collapse. This notion underlies modern financial regulation: the control of systemic risk requires controlling leverage. And, it is what drives proposals for high capital requirements and to tax leverage. But, as is always the case with regulation, the devil is in the details. For one thing, we need a way to measure leverage. This turns out to be a surprisingly difficult task. Second, while risk varies positively with leverage, risk-taking can increase without increasing leverage, so we need to think about all major forms of risk-taking that can threaten financial stability...
Read More