George Osborne and Mark Carney to play financial crash 'war game'
Chancellor and BoE Governor will be joined by US counterparts for exercise designed to end 'too big to fail'
George Osborne said the 'war game' will examine the failure of a big Wall Street bank, in a scenario similar to the collapse of Lehman Brothers Photo: Getty Images
By Szu Ping Chan, in Washington
11:01PM BST 10 Oct 2014
A financial crash to rival the one caused by Lehman Brothers' collapse will be played out by the world’s most powerful central bankers next week, in a “war game” designed to help end the “too big to fail” problem.
In the first simulation of its kind, Janet Yellen, the head of the US Federal Reserve, and Mark Carney, the Governor of the Bank of England, will be joined by Chancellor George Osborne and US Treasury Secretary Jack Lew, who will be tested on their reaction to a major US or UK bank failure.
The exercise, designed by regulators on both sides of the Atlantic, forms part of a series of measures designed to end the phenomenon of “too big to fail”, limit the risks to financial stability and protect taxpayers from future bailouts.
Mr Osborne said the “war game”, which will take place in Washington after the International Monetary Fund’s annual meeting, will examine the failure of a big Wall Street bank with UK operations, and that of a major UK bank with a division in the US.
"We're going to make sure that we handle an institution that would have previously been regarded as 'too big to fail'," he said. "We're confident that we now have choices that did not exist in the past, so we don’t have to choose between bailing a bank out and letting it collapse.
"London is a global financial centre, and is both home and host to some of the world’s biggest and most important banks. This brings with it many opportunities for jobs and growth, but we need to make sure that taxpayers are not on the hook for future bank failures."
UK policymakers have conducted similar exercises at a working level, with a war game simulation testing the City's defenses against a cyber attack. However, Monday’s exercise is the first to involve top policymakers on both sides of the Atlantic.
Minouche Shafik, the Bank of England's deputy governor for markets and banking, and US Securities and Exchange Commission chairman Mary Jo White will also be present.
“I think this demonstrates the distance that we've come in the last few years, to build resilience, to learn the lessons of the financial crisis, to make sure we are better prepared for whatever the world throws at us in the future," said Mr Osborne.
The initial findings of the simulation will be published next week, and will form one of the cornerstones of G20 proposals to strengthen the financial system that Mr Carney, who is also head of the Financial Stability Board, is expected to present in Australia next month.
Britain has already taken steps to create a safer banking sector by implementing reforms to change remuneration and make senior executives more accountable for bank failures.
Under new proposals to prevent runs on banks, the Bank of England also unveiled measures this week that would ensure savers would see deposits of up to £1m protected if a lender collapsed.