COMMENT The first stage of de-risking of the banking sector was led by the markets. Fueled by massive concern about the banks’ lax risk management practices and related over-exposure to toxic assets, the process was vicious and indiscriminate. With the market-induced contraction of the banking sector over-shooting, the highly disruptive implications for employment and economic activity forced policymakers into a “WIT” mindset – doing ”whatever it takes” to stabilise the sector.
The massive policy reaction succeeded in stabilising the banking system. And while the banks are still not lending in any meaningful manner to the real economy – an issue that will become politically even more problematic as unemployment continues to rise in the industrial countries (particularly, in the US and UK) – most have used the extraordinary policy support to strengthen their balance sheets and, also, take on risk.
