The financial turmoil is not over

THERE is an old investment saying that bull markets last longer than you think possible, and bear markets hit harder than you can imagine. This is one reason why investors should be positive most of the time. However, once every eight to 10 years, it pays to be cautious. The recent spate of bank failures suggests that now is one such moment.

Policymakers want to present these bank failures as idiosyncratic and unlikely to trigger a broader systemic crisis. We are unconvinced. First, we have a different view of the nature of systemic risk. And second, a decade of low rates and easy money has distorted capital allocations in ways that increase the risk of systemic crisis.

Successive financial crises have shown that systemic risk is multiplicative. The failure of a small entity can have severe consequences for the whole system. Fault lines tend to show up in the weakest links in systems, not necessarily the largest. Despite this, policymakers continue to obsess about the larger institutions as systemically important, only to be blindsided by smaller players that are less well-capitalised and less tightly regulated.