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Mr. Timothy Geithner

sale at prices that, if applied as a measure of asset quality across the system, will appear to make large parts of the financial system insolvent. This dynamic is not self-correcting. Left unchecked, it will simply accelerate. The dynamics of contagion are not fully knowable, or mappable, ex ante. To paraphrase Rudi Dornbush, runs happen gradually and then suddenly. 1 Their characteristics and severity depend on how things evolve in the event, and on the response of policy. This is not principally about the first round effects of direct losses from a given

Mr. Timothy Geithner


The choices we make in advance of the next financial crisis will have a major impact in determining the magnitude of the economic damage. Our vulnerability to crisis depends on the strength of the protections we build into the financial system through prudential regulation, as well as on the degrees of freedom we create for ourselves to respond to the unanticipated, and the knowledge and experience we bring in managing crises. Is the financial system safer today? With the reforms now in place and with the memory of the crisis still fresh, how confident should we feel about the resilience of the financial system and our ability to protect the US economy from a major financial crisis? Warburg Pincus President and former US Secretary of the Treasury Timothy Geithner attempts to answer these questions in his October 2016 Per Jacobsson Lecture.


Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago, May 10, 2002; Group of 10 (G-10) Contact Group on the Legal and Institutional Underpinnings of the International Financial System, “Insolvency Arrangements and Contract Enforceability” (September 2002); Bethany Blowers, “The Economics of Insolvency Law: Conference Summary,” Financial Stability Review of the Bank of England, at 154 (December 2002); IMF Legal Department, Orderly and Effective Insolvency Procedures (Washington: IMF, 1999); Stijn Claessens, “Experiences of Resolution of Banking

Mr. Jaime Cardoso and Mr. Philip M Young

were reviewed along the lines of the Basel agreement, rules on provisioning were clarified to ensure their enforcement, and limits on lending were established to minimize concentration risk. A draft Monetary and Financial Code was presented to congress to reform the statute of the central bank, strengthen banking supervision, and promote competition in the financial system. Enforcement of the new prudential regulations brought to light the weaknesses of the financial system. Insolvencies led the central bank to intervene in support of troubled institutions 13 and a