The Illusion of Resilience: How a Vague Concept Became a Global Financial Mantra
The Evolution of a Misleading Promise:
In the aftermath of the 1997 Asian crisis, the financial world embraced a new buzzword: 'resilience'. But here's the catch—this term has gradually replaced the once-prominent goal of 'stability', yet it lacks a clear and consistent definition. Since 2015, global financial institutions like the Bank of England, the IMF, and the Financial Stability Board have increasingly favored 'resilience' in their reports, shifting the focus from crisis prevention to crisis endurance.
This linguistic shift is more than just semantics; it reflects a fundamental change in how financial authorities approach their role. While stability was once the cornerstone, resilience has taken center stage without a clear operational meaning. This ambiguity allows policymakers to interpret it as needed, making it a convenient yet potentially dangerous concept.
The Journey of Resilience:
Borrowed from ecology, resilience in economics has two contrasting interpretations. It can mean returning to equilibrium (engineering resilience) or adapting to new states (ecological resilience). Financial institutions adopted the term without specifying which interpretation they adhere to. This vagueness enables them to invoke resilience to justify various actions, making it a versatile but elusive concept.
The Policy Paradox:
The shift from stability to resilience is evident in policy paradigms. Initially, the focus was on crisis prevention and capital rebuilding, measured by capital ratios and liquidity coverage. Later, sustainability entered the picture, emphasizing long-term solvency and fiscal prudence. Now, resilience dominates, emphasizing shock absorption and uncertainty management, but without standardized metrics.
The Measurement Conundrum:
The lack of a clear definition for resilience leads to chaos in financial assessments. One report might applaud macroeconomic resilience, while another highlights financial vulnerabilities. The problem deepens when considering balance-sheet, system-level, and macroeconomic resilience, each with its metrics and assumptions. When these levels diverge, policy decisions become contradictory.
The Theoretical Tightrope:
Theoretically, resilience at one level often requires disruption at another. For instance, forest health benefits from periodic fires. However, financial institutions seek resilience at all levels simultaneously, creating a paradox. When institutions collectively increase buffers, credit intermediation suffers, and individual prudence can lead to systemic fragility, as seen in Japan's capital strengthening and credit stagnation.
Real-World Measurement Failures:
The measurement gap became evident during the Silicon Valley Bank crisis. Existing frameworks focused on resilience to credit losses, not digital-era deposit runs. Despite the Federal Reserve's assurance of a resilient system, authorities intervened to protect banking system resilience, revealing the inadequacy of current metrics. A similar scenario played out in the UK's 2022 liability-driven investment crisis, where resilient pension funds required substantial intervention to prevent market collapse.
Shadow Banking's Role:
The measurement challenge intensifies with shadow banking, which represents over $70tn in non-bank financial intermediation. While banks' exposures to non-bank financial institutions are significant, resilience frameworks remain bank-centric. This mismatch between measurement and risk concentration exacerbates the problem.
A Call for Operational Clarity:
Other fields define resilience operationally. Cybersecurity sets recovery time objectives, and climate adaptation identifies hazard-specific tolerance thresholds. In contrast, finance demands resilience to all shocks at all levels, an unrealistic expectation. This ambiguity allows institutions to claim resilience while taxpayers bear the burden of failures.
The Systemic Risk:
Treating resilience as a goal rather than a measurable condition leads to economic dilemmas. Buffers come at a cost. When capital conservation restricts credit and universal guarantees weaken discipline, balance-sheet resilience conflicts with macroeconomic resilience. The pandemic exposed this, as $10tn in market support was framed as resilience, despite revealing underlying fragility.
Emerging Markets' Dilemma:
Emerging markets face the brunt of this ambiguity. Credit ratings, influenced by divergent resilience assessments, impact borrowing costs. Promises of economic resilience lack specificity, leaving citizens unsure of what it entails. Is it employment protection, price stability, or crisis management?
The Need for Clarity and Accountability:
Democratic oversight demands measurable objectives. When authorities redefine success retroactively, accountability vanishes. To address this, three changes are necessary: defining resilience at each level with corresponding metrics, acknowledging trade-offs between individual soundness and systemic stability, and accepting that adaptation requires controlled failures, not the prevention of all disruptions.
Beyond Semantics:
With $470tn in global financial assets governed by undefined principles, the issue is not merely semantic but systemic. Policymakers must decide if they can disentangle the convenience of resilience from its analytical discipline. Until resilience is defined, measured, and bounded, it remains a veil that conceals uncertainty while risks loom.
