Finance Needs to Be Prepared for the Unexpected

Ideally, nobody would have to worry about the burgeoning and multifaceted realm of nonbank finance: Let hedge funds, securities dealers and the like take whatever risks they want, as long as they bear the full consequences. Yet time and again in recent years, concentrations of leverage — or borrowed money — have collided with unexpected events to wreak havoc, catching authorities off guard and sometimes requiring emergency measures to avert broader economic damage.

Unexpected events will keep happening, particularly in today’s chaotic geopolitical environment. Lest the next one trigger a systemic crisis, regulators need to get a better grip on leverage.