The View | What can explain the mysterious sell-off in global banking shares?

Banking crises tend to unfold in the way a Great Depression era, Ernest Hemingway’s character described going broke: “Gradually and then suddenly.” How regulators, investors and markets react to crisis may be sorely tested in the European Union. And the way regulators have dealt with past transgressions will determine how difficult decisions are confronted in the future.

The US Department of Justice recently released a 228 page report explaining that it had considered laying criminal charges on top of the fine that it dropped on HSBC for its Mexican money laundering violations in December 2012. However, the DoJ faced objections from George Osborne, Chancellor of the Exchequer, who worried about the impact of a criminal case against the country’s biggest bank on the financial markets and economy.

If HSBC had been found guilty of criminal charges, the US government would have been required to review and possibly revoke its US banking licences- a death knell for any global bank.

Osborne wrote a letter to Ben Bernanke, who was then the Federal Reserve chairman, and Timothy Geithner, the Secretary of Treasury at the time, which said, “it would risk destabilising the bank globally, with very serious implications for financial and economic stability, particularly in Europe and Asia”.

If “too big to fail” and “too hazardous to jail” is the reality in today’s financially interconnected and morally ambiguous banking system then the most important question is who will stand behind and act as the lender of last resort to systemically important financial institutions.

Presently none of them can afford to fail in any way. If they cannot go bust or be prosecuted for fear of precipitating the Apocalypse then no one should believe in the efficacy of financial reforms since the subprime crisis. Indeed, the operation of modern finance must be considered seriously flawed.