7 Reducing the interconnectedness between institutions and markets The second G-20 imperative is to create a system that can withstand the failure of any single financial institution. From Bear Stearns to Hypo Real Estate to Lehman Brothers, markets failed that test. Today, after a series of extraordinary, but necessary, measures to keep the system functioning, we are awash in moral hazard.
To a degree I view this as a metaphor for specific steps to enhance market discipline, to emphasize that we have to move beyond rhetorical praise for markets to specific steps to harness the role of markets in monitoring risk-taking by banks. There may be other approaches that can accomplish this task, as good as or better than subordinated debt.