Yahoo Finance Stress test the world economy to nip future crises in the bud, says ex-Fed guru
The world’s central banks and financial authorities should club together to “stress test” the entire global economy in order to spot potential crises before they strike, a former top policymaker has proposed.
Regulators including the Bank of England, the Federal Reserve in the US and the European Central Bank already stress test the banks under their purview to see how the lenders could withstand recessions and to spot any problems building up in the system.
Randy Kroszner, a former governor of the Fed, now wants them to do the same for the global economy. “The true shocks never come from where you or markets expect,” said Mr Kroszner, now a professor of economics at Chicago Booth. “You should have a process in place whereby you are effectively doing a macroeconomic stress test.”
Mr Kroszner, who served as a Fed governor from 2006 to 2009, pointed out that problems can often build in the interconnections between institutions and between markets and that these are not necessarily policed by national or regional watchdogs.
He said: “For example, Northern Rock did not have US exposure or subprime exposure, but nonetheless because of its business model and global interconnections, it was fragile and was the first one to experience trouble in the financial crisis.”
The economist said that the authorities do think about these problems, but he would like to see a systematic process to regularly study emerging risks and interconnections.
He added that the US Department of Homeland Security and its equivalents around the world could also take part in the tests in order to help assess the risks posed by cyber crimes.
