SimulationU.S., U.K. war-game failure of too-big-to-fail banks

On Monday U.S. treasury secretary Jack Lew, his British counterpart Chancellor George Osborne, along with the heads of both countries’ central banks, participated in a simulation to test the actions that would follow should a major transatlantic bank went under. The scenario allows U.S. and British authorities to “make sure we can handle an institution that was previously regarded as too big to fail,” according to Osborne. War games have long been used to build trust and co-operation among allies and adversaries.

According to Government Executive, after the 9/11 attacks, many Western nations tested their ability to respond to a terror attack. In 2003, London simulated a chemical weapons attack on a subway below the city’s financial district, evaluating how participants from law enforcement agencies and emergency crews coped with decontamination and casualties. In March 2014, Barack Obama, Angela Merkel, and Xi Jinping played a war game in the Hague to test how they would deal with a terrorist nuclear attack. The simulation included a plot in which terrorists tried to carry out an attack on a Western city with a dirty bomb. The leaders were presented with four real-time options on a tablet. The group managed to halt the attack. China and the United States have also engaged in cyber-war games to test each other’s resilience to attacks from common adversaries.

In July, China joined more than twenty other nations in the U.S.-led Rim of the Pacific naval exercise around Hawaii. China participated in the humanitarian components and asked to operate under Australian command, a breakthrough in military co-operation. In 2015, NATO will host its own 40,000-troop war game in Spain and Portugal.

Yesterday’s financial war games, similar to previous military and terror war games, tested the ability of the U.S. and the U.K. financial sector to remain resilient under enormous stress and also to understand how both players operate. “It is an opportunity to make sure our different, but similar, domestic arrangements work,” Osborne told the Financial Times.

Enacting a war game, however, does not guarantee the ability to prevent and properly respond to an attack or crisis. Two years after London authorities staged a mock chemical attack in the London underground, four suicide bombers attacked the London underground and bus systems, killing fifty-two people. In 2004, the Bank of England and the Financial Services Authority, which was then the U.K. banking regulator, engaged in the first of a series of war games to deal with the potential collapse of a major financial institution. That war game taught financial regulators how faults within one bank could spread to the financial sector at large, but it was unable to prepare British authorities to deal with the effects of what would be the 2008 U.S. economic slowdown, when the U.S. subprime crisis led to banks around the world being reluctant to lend to each other. “No war game is like war itself. But it means we will be far better prepared,” Osborne said.