In this essay, I will review the key sources of fragility in the core financial system. The first section focuses on the weakly supervised balance sheets of the largest banks and investment banks. This failure of financial supervision has been widely, if retrospectively, recognized. As one example, Rich Spillenkothen (2010), director of banking supervision and regulation at the Federal Reserve Board from 1991 to 2006, wrote that “prior to the crisis, career supervisors in the regions and at agency headquarters—primarily at the Federal Reserve, Office of the comptroller of the Currency (OCC), and SEC—failed to adequately identify and prevent the build-up of extreme leverage and risk in the financial system, particularly in large financial institutions.” In a recent University of Chicago poll, US and European economists were asked to gauge the relative importance of twelve factors contributing to the financial crisis. The factor receiving the highest average importance rating in both the European and the American polls was “flawed financial sector regulation and supervision” (IGM Forum 2017).
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