“The main financial risk facing the United States today looks very similar to what caused so much trouble in 2007-2008: big banks with too much debt and too little equity capital on their balance sheets. Uneven global regulations, not to mention regulators who fall asleep at the wheel, compound this structural vulnerability.

“We already saw this movie, and it ended badly. Next time could be an even worse horror show.”

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“But the most dangerous shocks may be those that originate with the big banks themselves. The latest significant development to surface is what Better Markets, a pro-reform group that has put out a helpful fact sheet, calls “de facto guaranteed foreign subsidiaries” that trade derivatives – a murky phenomenon that likely involves all the big players. The trick here is that a de jure guaranteed foreign subsidiary of a US bank would have to comply with many US rules, including those governing conduct, transparency, and clearing (how the derivatives are actually traded). A foreign subsidiary that is supposedly independent is exempt from those rules.

“But, as Dennis Kelleher of Better Markets points out, when pressure mounts and a crisis seems around the corner, banks will face great pressure to bring such subsidiaries back onto their balance sheet. This is exactly what happened in the last crisis, with Citigroup being a leading example.”

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Read the full Project Syndicate article by Simon Johnson here.