Is every crisis a 'major examination' for the financial system?

Is Every Crisis a "Stress Test" for the Financial System?

This analogy is very fitting, and it's largely a consensus within the financial community.

You can imagine the entire financial system as an extremely complex machine, or a human body. Under normal circumstances, it operates smoothly – people earn money, invest, lend, and everything seems perfectly normal. But it's only when it encounters extreme pressure that you can truly see how robust it is, and what hidden "ailments" it has that are invisible during ordinary times.

Every financial crisis primarily tests the following aspects:

1. Resilience

This is like stress-testing a large bridge to see how much traffic and impact it can withstand. When a crisis hits, market panic sets in, people frantically sell off assets and withdraw funds, which is akin to thousands of heavy trucks suddenly rushing onto the bridge all at once.

• The Test: Will the entire system instantly collapse due to a single weak link (e.g., the failure of a major bank), triggering a domino effect? Will liquidity suddenly dry up?
• Example: When Lehman Brothers collapsed in 2008, the entire system nearly went into "shock" – a clear sign of insufficient resilience.

2. Effectiveness of Regulations

Financial regulation is like urban traffic rules, designed to ensure the safe and efficient flow of traffic (capital).

• The Test: Do existing "traffic rules" have significant loopholes? Are there instances of "reckless driving" (e.g., overly complex financial derivatives) that go unregulated? Are there "intersections" (markets) that completely lack traffic lights?
• Example: The 2008 financial crisis exposed numerous regulatory vacuums in shadow banking and financial derivatives. After the test, countries quickly introduced new regulations, effectively "installing traffic lights" and "deploying traffic police" in these areas.

3. Risk Management Capabilities of Individual Institutions

This major test not only assesses the system as a whole but also every "examinee" within it – banks, investment banks, fund companies, and so on.

• The Test: Have these institutions effectively managed their own risks? Have they put too many eggs in the same basket? Is the risk control department merely a facade, neglecting long-term risks in pursuit of short-term profits?
• Example: Many companies that collapsed during crises were later found, upon review, to have severe internal risk control issues and an excessive propensity for gambling.

4. Response Speed and Capability of the "Fire Brigade"

When a crisis (fire) occurs, central banks and governments act as the "fire brigade" and "emergency response center."

• The Test: Can the "fire brigade" quickly locate the source of the fire? Are the "extinguishers" they use appropriate for the situation? Should they provide direct financial aid (liquidity support) or cut interest rates? Will the rescue plan trigger new problems (e.g., the moral hazard of "too big to fail," encouraging large institutions to act more recklessly in the future)?
• Example: The rapid interest rate cuts and quantitative easing by global central banks at the onset of the pandemic were an emergency response that prevented a wider financial meltdown.

Post-Test Review and Remedial Actions

Crucially, after every "major test," there's a painful but invaluable phase of "review" and "remedial action." Regulators and market participants sit down to analyze: "What exactly went wrong this time?" Then, addressing the weaknesses exposed, they introduce new regulations, establish new standards, and "patch" the system. For instance, after 2008, global requirements for bank capital (Basel III) were generally increased, meaning banks had to hold more "reserves" just in case.

Therefore, saying that every crisis is a "major test" is highly accurate. While this process is painful and causes losses for many, it is also a necessary way for the financial system to self-correct and evolve. It forces everyone to re-examine risks, refine rules, and make the entire system more "robust" for the next storm. This is like an ongoing process of leveling up and battling monsters; there's never a final perfect state, because new risks (new "test questions") will always emerge in unexpected ways.