Regulators during the crisis were most concerned about the nearly unmanageable spike in systemic risk which, according to the IMF, FSB and BIS, is defined as "a risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy."
U.S. Federal Reserve: Although the sources of the crisis were extraordinarily complex and numerous, a fundamental cause was that many financial firms simply did not appreciate the risks they were taking. Their risk-management systems were inadequate and their capital and liquidity buffers insufficient. Unfortunately, neither the firms nor the regulators identified and remedied many of the weaknesses soon enough. Thus, all financial regulators, including the Federal Reserve, must undertake unsparing self-assessments. At the Federal Reserve, we have extensively reviewed our performance and moved to strengthen our oversight of banks. Working cooperatively with other agencies, we are toughening our banking regulations to help constrain excessive risk-taking and enhance the ability of banks to withstand financial stress.[1]
Bank for International Settlements: Systemic risk was underestimated across the board before this crisis. We were faced with the unthinkable when a number of very large institutions failed, despite their previous reputation for balance sheet strength and leadership in risk management. Coming to grips with systemic risk is vital because the aggregate risk facing the system is much higher than the simple sum of the individual risks attending financial institutions, products and markets. [2]
European Central Bank: Two weaknesses of the supervisory and regulatory approach that we had before the crisis stand out. For one thing, the old approach focused too much on individual risks and too little on interconnections across intermediaries and markets. For another thing, it generated a lot of information about some types of intermediaries but much less on others (including the shadow banking system). This made it difficult to understand fully the pro-cyclical behaviour of the system in the aggregate.[3]
Deutsche Bundesbank: The most prominent shortcomings revealed by the financial crisis fall within the scope of credit risk transfer and the expansion of the “originate to distribute” business model that accompanied it. These deficiencies concern insufficient capital backing for securitisations as well as inadequate risk management within financial institutions and a lack of transparency in the whole transfer process. Consequently, the necessary modifications affect all three pillars of Basel II. … Undisputably, Basel II acts in a risk-sensitive manner and therefore responds cyclically to economic developments. … The question is, however, whether or not Basel II acts pro-cyclically in the sense that the increase in capital requirements in times of financial stress or economic downturn is such that the resulting decrease in bank lending threatens to cause a downward spiral or a credit crunch. [4]
[1] Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal Reserve System, at the Economic Club of Washington DC, Washington DC, 7 December 2009.
[2] Mr Jaime Caruana, General Manager of the BIS, “Systemic risk: how to deal with it?”, 12 February 2010
[3] Mr Jean-Claude Trichet, President of the European Central Bank, at Clare College, University of Cambridge, England, 10 December 2009.
[4] Dr Axel A Weber, President of the Deutsche Bundesbank, London, 24 September 2009