Treasury officials from the U.K. and U.S. met Oct. 13 to simulate the possible failure of a large transatlantic bank The objective of the so called “war game” simulation was to construct a plan of action that would do the least damage to the global economy in the event of a major financial institutions failure.
The simulation comes with serious turmoil lingering in the European market and signaled that a downfall in the European market could affect us more than we know.
The collapse of Lehman Brothers, a global bank, in 2008 almost brought down the world’s financial system.
It took massive taxpayer-funded bailouts just to keep the industry afloat. Repercussions of the great recession continue to ripple throughout the economy today. The war game will allow officials to gauge a better response to a situation similar to the fall of Lehman Brothers. Prior to the simulation, financial ministers from the world’s largest economies met to address continuing efforts to strengthen financial regulation in an attempt to prevent a repeat of the 2008 crisis.
Last week’s exercise was designed to test whether the new rules for bank regulation would be effective following the collapse of a colossal bank. The results will not be published and are spoken of with great discretion.
A sense of false optimism surrounded U.K. Chancellor George Osborne as he fielded questions on the war game.
“We will work through how we would respond to the failure of a cross-border firm. We are going to make sure we could handle an institution previously regarded as too big to fail,” Osborne said.
The Chancellor later went on to contradict himself saying “We still need to make sure that taxpayers are not on the hook for future bank failures.”
United States Federal Governor Dan Tarullo was more blunt, saying that “cross-border complications stemming from a large bank failure remain to be addressed.”
While measures of regulation have been enhanced, it is clear that no financial institution is “too big to fail.”
The challenge regulators now face is allowing a single bank to go under without triggering such a severe impact on the global economy — easier said than done.
Still not fully recovered from 2008, one more taxpayer-financed bank bailout would be terribly detrimental to the U.S. economy.
The potential magnitude remains a mystery, but another financial crisis may be looming.