These were apparent six months ago, but have escalated markedly in the intervening period. Not only did yields on the obligations issued by so-called “peripheral” euro area countries reach new highs, but interest rates faced by large countries like Spain and Italy also rose to levels that would have made their financial positions much more difficult.
The risk to the financial system is not equivalent to the average risk to individual firms. This was strikingly illustrated in the crisis, as it was individual institutions’ attempts at self-preservation that transmitted and amplified stresses throughout the global system. Addressing system-wide risks requires new tools, and here, too, there has been considerable progress.