Policy Insights
Policy Insight 136: Financial resilience as flood containment
In The Resilient Society, Brunnermeier (2023) considers lessons from the COVID-19 experience and other large shocks which could not have been anticipated, let alone prevented. He proposes rebalancing our prudential approach towards resilience, reinforcing our capacity to respond to a shock after the primary defences fail.
The classic analogy drawn by Aesop, the ancient Greek writer of moral fables, is how thin reeds bend to strong winds without breaking, while strong oaks fully resist a storm but ultimately break. The key insight is that a flexible response can adjust better under intense pressure.
Similarly, financial stability requires a balance of ex-ante solidity to withstand shocks and ex-post resilience in response to large shocks that overcome primary defences. Basel III capital and liquidity buffers provide structural solidity.
