17 May, 2016
A new economic crisis, which we are on the brink of experiencing, will have similarities, and differences, to 2008. The problem of crowded trades – where market participants all have the same basic positions and strategies, and identical risk models – will be familiar. The effect of new regulations, ironically designed to minimise the risk of a new crash, and a reduction in trading liquidity will create new problems. Extra capital, while welcome, does not alter the level of risk, but merely who bears it. To recapitalise banks, regulators have approved risky hybrid securities, such as contingent capital and bail-in bonds. In the event of a systemic crisis, losses will be transmitted to insurance companies, pension funds and private investors; bailing them out may be politically necessary or expedient.