Delayed regulatory action worsens financial losses and forces bailouts, argued Enrico Perotti. This became particularly evident in the March 2023 crisis when Credit Suisse failed to raise questions about preventing bank runs. In the discussion, the economist from the University of Amsterdam highlighted an "intervention gap" between recognizing distress and taking decisive action.
On 13 February 2025, during the SAFE – CEPR Policy Web Seminar “Financial Resilience as Flood Containment”, Perotti presented his findings followed by a discussion with Mathias Dewatripont from the Solvay Brussels School of Economics and Management and CEPR and Loriana Pelizzon from SAFE and CEPR as moderator.
The role of supervisory response in financial crises
Perotti said that legal uncertainty and fears of triggering market panic prevented a quick supervisory response. Drawing an analogy to flood control, he stressed that effective crisis management requires timely interventions to disrupt self-reinforcing bank runs. "Once distress starts, banks are not very resilient. The key issue is that we delay intervention, hoping the problem will go away," Perotti stated. "But that only causes larger losses, undermining recovery and ultimately leading to bailouts. We need clear mandates for timely action."
While Basel III regulations provide shock resistance, banks remain vulnerable once distress sets in. In the seminar, Perotti proposed measures such as prepositioned collateral for swift liquidity support, redemption charges to slow withdrawals and prevent panic, contingent AT1 debt conversion for rapid recapitalization, and proactive central bank lender-of-last-resort mechanisms. These tools, he argued, act against financial distress, buying time for stabilization.
Dewatripont largely agreed with Perotti’s framework, particularly the flood management analogy and the issue of regulatory procrastination. "We have this resilience problem of procrastination," Dewatripont noted. "Even though Basel III has reinforced resistance, hesitation in acting early—out of fear of triggering market panic—has made crises worse.” According to him, the Credit Suisse case highlighted the risks of delayed intervention, though he viewed its resolution as ultimately successful.
Dewatripont questioned the applicability of money market fund regulations to broader bank resilience. Additionally, he suggested balancing deposit protection with an element of strategic ambiguity to avoid moral hazard.
The seminar underscored the need for proactive regulatory frameworks prioritizing early intervention over last-resort bailouts. While opinions varied on specific solutions, there was consensus on addressing the "intervention gap” between an identified issue and the necessary action being taken.
