The Changing Architecture of Trust

With the benefit of hindsight, it is now clear that the Great Financial Crisis (GFC) marked a turning point in the stability of the economy and financial system. The golden era that had existed, with minor disruptions, between the institutionalization of the New Deal financial regulatory regime and the onset of GFC vanished. And despite fervent hopes and initially significant effort, there is little sign that it is going to come back anytime soon.

There has yet to be another global financial crisis, but government backstops to avoid systemic distress have become increasingly common. The Federal Reserve’s emergency lending authority, which had lain dormant between the 1930s and 2008, was used twice in the past five years. U.S. regulators also felt compelled to invoke the systemic risk exception during the regional bank debacle of 2023. The Bank of England intervened in the market for long-term gilts — buying them at a time the Bank was otherwise seeking to tighten monetary policy — to prevent a fire sale and to help ward off possible contagion. And the Swiss government felt compelled to provide meaningful support to facilitate UBS’s acquisition of Credit Suisse.