For example, the recent reports issued by the Senior Supervisors Group (SSG), which is composed of regulators from five major countries, indicated that the banking regulators both here and abroad should have been tougher in the assessment of the quality of management, of governance, and in terms of these banks’ risk management  1  There is a growing body of economics literature on this issue that links monetary policy to leverage. See, for example, Tobias Adrian and Hyun Shin, manuscript in preparation for the forthcoming Handbook of Monetary Economics, volume 3, currently circulated as Federal Reserve Bank of New York Staff Reports, No. 398, October 2009. 2  BIS Review 161/2009  capabilities. 2 We should also have pushed harder for better management information systems and more simplified corporate organizations and structures. We should have done more to identify best practices in terms of risk management, liquidity, capital, and compensation and pushed harder to force the laggards to move to best practice standards. We are learning a lot about how to do supervision better and are working aggressively to apply those lessons to our current practices. The Supervisory Capital Assessment Process or SCAP is an important example of the value of broad, horizontal examinations. In the SCAP, the Federal Reserve worked in conjunction with other U.S. regulators to assess the impact of a stress economic environment on the 19 largest banking organizations in the country simultaneously. This approach made the SCAP a particularly powerful exercise.
But there is a limit, largely determined by market forces, on how much debt an individual or a firm can incur. Lenders, whether banks, finance companies or bond investors, would look at the creditworthiness of the borrowers and demand high interest rates to cover the credit risks or simply refuse to lend any more if the repayment ability of the borrower is in doubt. Moreover, a person with a reasonable mind would need to consider the risk of facing the unpleasant consequence of bankruptcy if he fails to repay his debts on time. The same applies to the owners or managers of companies. However, it is quite different when it comes to government debts. 13. In times of war, the government has no choice but to borrow from every possible source to finance the warfare as it is a question of survival of the nation. We all understand this and BIS central bankers’ speeches  3  so did the peoples of the countries at war. However, the developed countries have not been at war with each other for a long time since 1945 and why did their governments keep on piling up public debts to unsustainable levels? There are many complicated reasons as well some rather simple reasons. Let me go straight to the simple reasons today.