Two aspects of the US subprime crisis are examined. First how, with cross-border banking, financial crisis can spread internationally irrespective of the exchange rate regime; and second, why appropriate regulation must take account of ‘externalities’, particularly those operating through asset prices. With VaR rules and mark-to-market pricing alone, the financial system can exhibit ‘catastrophic’ behaviour. Though the focus is on a specific financial crisis, the observations closely match what Helene Rey has argued on the basis of studying the ‘global financial cycle’ more generally; namely that, with cross-border banking, a floating exchange rate cannot ensure monetary independence; and that prudential regulation is a more relevant policy option – possibly supplemented by capital controls. The chapter ends by suggesting that, when the Queen asked why economists at LSE had not seen the crisis coming, she could have been advised of the repeated warnings of the systemic instability of the Basel regime given by some LSE economists well before the crisis. As to why such warnings were ignored by the Basel regulators, we cite Charles Goodhart’s conclusion: that it was a case of ‘intellectual capture’.