Last Friday, we outlined the systemic-risk implications of the growing EU crisis. In the days that followed, LIBOR spreads tightened, funding dried up and our fears only rose. So, we were a bit surprised to hear a senior U.S. bank regulator tell a radio audience Thursday morning not to bother their heads about any prospects that the European crisis could wash ashore. That was, of course, followed in a few hours by a classic systemic-risk crisis on the exchanges. Was the U.S. regulator keeping the game-face on so as not to scare the children? Or, more worryingly, are U.S. regulators still unprepared for another bout of systemic risk, whistling in the dark much as they did when they told us that subprime-mortgage risk couldn’t spill over?

Much of what happened last week tracked our forecast of worsening liquidity risk with solvency impact. But, the market plunge was a new dimension in the ongoing systemic-risk crisis. What’s so frightening about it is that it compounded the very treacherous situation resulting from fragile financial institutions with the sudden shock of failure by shaky market infrastructure.

We’ve had a bout with systemic risk from market infrastructure in the past decade – think September 11, 2001. Then, as we all too sadly recall, the Twin Towers fell. With them went the vast underground computer network of the Bank of New York. With it, in turn blew the basic market infrastructure for trading, clearing and settlement. That almost brought the global financial system to rubble. Had the Fed then not rushed the then-unprecedented sum of $139 billion into the market, systemic risk resulting from system failure would have been all too real.

Now, of course, the Fed’s $139 billion seems cheap. Even after governments spent trillions in the fall of 2008, the EU is still having to pour hundreds of billions of dollars to prop up its banking system. We can only hope it works. At the least, the rescue packages need to settle markets back to their prior state of vague unease, giving policy-makers a bit more time to finalize overdue and urgent reforms.

One of these that’s gotten little notice in the U.S. is a provision in the reform package that addresses precisely the market failure experienced all too dizzyingly on Thursday. It’s a title that gives the Federal Reserve additional authority over any market “utility,” including “critical infrastructure” deemed to pose significant risk to broader financial markets.

This title was surprisingly struck from the House bill with virtually no discussion after some Republicans argued that it was too burdensome. It remains in the Senate bill and, if ever in danger, now is wholly secure as a part of the final legislative package.

Is the Fed the right regulator for all of this infrastructure? It knows a lot about payment systems, as well as settlement and clearing. However, its ability to grasp other market infrastructure is at the least untested. There’s a lot of this out there – not just the current stock exchanges, but also the new OTC derivatives clearing entities created elsewhere in the legislation. The Fed must, and we expect that it will, work very closely with the SEC and CFTC to get these entities up to snuff with regard to circuit-breakers, contingent planning, operational resiliency and the many other safeguards largely put into place on the banking side of the financial infrastructure since 9/11. All too many of these are missing in other market functions, and we’ve just learned how vital they are.

The only comfort in the current crisis is that it might finally stop EU regulators from blaming market woes on the U.S. Because the last bout of systemic risk came from U.S. mortgages, rating agencies and financial institutions, non-U.S. regulators understandably pointed their fingers our way. This permitted all too much tut-tutting about mortgages and too little real work on the wholesale inability of the EU as a whole and at national levels to address banking-system and cross-border risk. Well, better late than never.

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