Veterans of the 1987 market crash said Wednesday that the rebound after this week's stock plunge shows that the U.S. financial system was much better prepared but is increasingly susceptible to world economic changes.
Speaking at a coincidentally timed conference on the 1987 crash hosted by the Brookings Institution and the Wharton School, former regulators warned that governments around the world need to strengthen bank supervision and cooperation.
Since 1987, "markets have become more global - dramatically so," said Nicholas F. Brady, former treasury secretary and head of a commission that investigated the crash a decade ago. That panel recommended such reforms as the "circuit breakers" that halted trading twice during Monday's 554-point slide in the Dow Jones industrial average.
"A higher degree of vigilance on the part of all is needed," said E. Gerald Corrigan, former president of the Federal Reserve Bank of New York. "While the risk of a systemic market meltdown is low, such an event, were it to occur, could be more difficult to contain than in the past."
All the regulators agreed that their biggest worry after "Black Monday" in October 1987 was a collapse of the payment system.
"The system was moving too fast for the clearance and settlements to take place," explained Mr. Brady, who said a $1.4 billion deficit had to be hastily settled the next morning.
(Treasury Secretary Robert Rubin said Monday after the big plunge that "the payments and settlements systems are working effectively.")
The crisis Monday was less threatening because the economy is much healthier and U.S. financial institutions are "materially more robust" than 10 years ago, Mr. Corrigan said. Payment systems move faster and can handle many more transactions, he said.
However, payment systems have to be improved still further so that settlements occur on the same day instead of within three days, Mr. Corrigan said. And, although beefed up, supervision and risk management practices should be bolstered further, he said.
Mr. Brady defended the use of circuit breakers, which critics say interfere with the market. He argued that the procedures stopped the Dow's fall on Monday and gave small investors a break to catch up with the fast-paced market.
Mr. Corrigan said he was skeptical about circuit breakers. "They need some fresh thinking," he said.