Former Federal Reserve Chair Arthur Burns' prescient warning in 1987, continued:
"Regulators are concerned about other aspects of the innovation phenomenon. For example, where new products involve chains of counterparties, banks may be inadequately informed about the credit-worthiness of some and therefore of the risks in the arrangement . . .
Of all the reasons that bank regulators now have for devoting close attention to banks, by far the most important is the possibility that the failure of a single major bank may precipitate ‘systemic’ failure – a chain reaction in which failing institutions bring others down. Historically, the larger banks themselves have acted as a buffer against financial shocks by playing the role of ‘lender-of-next-to-last resort’ . . . .
But if the securitization process goes much further, as it well may, and banks thus become less important as financial intermediaries, they may no longer be able to extend credit on the scale needed. Beyond that, and as a result of the globalization of banking and the weaving of intricate financial connections among widespread institutions, financial shocks might nowadays be transmitted across markets with alarming speed.
The threat of systemic failure is all the more disturbing because there is no international counterpart to the national safety nets. . . More worrisome than such possibilities is the fact that national [financial] safety nets in the United States, Japan, and perhaps elsewhere do not embrace investment banks. Some of these institutions have become so large that the failure of one of them could have serious international repercussions.”
-- Arthur F. Burns, The Ongoing Revolution in American Banking (American Enterprise Institute for Public Policy Research, 1988), pp. 39-42.
