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There may be trouble ahead

Is there systemic danger lurking in the financial sector? To any regulator worth his or her salt, the answer to that question must always be yes.

But to those for whom scepticism is not part of the job, it might appear to be a redundant question. Recent banking crises have arisen out of poor controls, too much decentralization, bad management and unforeseen events suddenly swamping weak institutions.

The last few years have been characterized by moves to address these concerns. Risk management is now more sophisticated, and a central tenet of most banks' operations. Management has a better grasp of the subject. There's not much to be done about the unpredictable high-impact event, but banks appear more prepared than ever to manage most crises.

Size plays a role here: there are fewer players at the top table for whom a $500 million loss, such as at Bankers Trust, or a $1 billion loss that felled Barings, would be fatal. The crisis following the Russian default and collapse of Long-Term Capital Management showed how a small group of large players could avert a meltdown.

But has size become a problem? A handful of banks are responsible for the majority of credit provision.

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