- A safer banking system. Thanks to strengthened capital buffers, more responsible approaches to balance sheets and better liquidity management, the banks no longer present a major systemic risk in most advanced countries, and especially the U.S. That doesn’t mean every country and every bank is safe; but the system as whole is no longer the Achilles’ heel of market-based economies
- A more robust payments and settlement system. The strengthening of the banking system has been part of a highly successful, broader effort to minimize the risk of “sudden stops” in the payments and settlement mechanisms at the core of the global economy — that is, a loss of trust in counterparts that freezes even the most basic financial transactions, paralyzing economic interactions.
- Smarter international cooperation. The crisis highlighted the importance of better approaches not just to crisis management, but also to prevention. At the top of the “to-do list” are steps such as improved harmonization of strengthened regulation and supervision, more timely and comprehensive information-sharing, and greater focus on the challenges of monitoring internationally active banks. Individual countries have been able to draw on a wider set of insights in bolstering both their macro- and micro-prudential efforts.
- Still-elusive inclusive growth. It took far too long for policy makers in advanced countries to realize that the great recession caused by the financial crisis had important structural and secular components. An excessively cyclical mindset initially impeded the design and implementation of the measures needed to generate high and inclusive growth. By the time mindsets evolved, the political window had narrowed. Even today, most advanced countries have yet to adopt measures to durably boost actual growth and stop the downward pressure on potential expansion.
- Misaligned internal incentives. Judging from headline-grabbing incidents of inappropriate behavior and processes in recent years, the sticks and carrots in place in some financial institutions need work. These institutions still contain pockets of improper risk-taking and other unsuitable conduct, as well as excessive short-termism in compensation payouts and managerial tolerance for actions that are too close to the line that separates permissible from non-permissible activities.
- A scarcity of “patient” balance sheets. Putting challenged and damaged securities in ring-fenced balance sheets was key to containing the huge financial disturbances. This involved reliance on large public balance sheets, though their use was increasingly met by social and political pushback. Concerns about distributional effects, including favoring corporate profits at the expense of wages, Wall Street at the expense of Main Street, and the rich at the expense of the poor, have added to what is now a reduced availability of these tools for use in future crises.
- The big got bigger and the small got more complex. Although more progress has been made on what to do when a bank fails, especially when it is large, the market structure that emerged from the financial crisis involves significantly larger institutions, particularly U.S.-based ones. The same phenomenon of the big having gotten bigger can be seen in asset management. It has come at the expense of a gradual hollowing out of the middle of the distribution of financial firms. Meanwhile, the other end of the size distribution consisting of small institutions has been increasingly populated by the proliferation of fintech activities that, for the most part, haven’t been tested through a cycle downturn.
- Risk has morphed and migrated to underregulated areas. This change in market structure is connected to another phenomenon: the morphing and migration of risk to non-banks. This dynamic is particularly notable in the extent to which, benefiting from years of ample global liquidity and unusually low financial volatility, there has been an over-promising of liquidity provision and excessive volatility-selling in its many forms. And part of this has been embedded in the structure of the system through product proliferation, including the growing number of exchange-traded funds that implicitly promise instantaneous liquidity in market segments that are structurally subject to repeated pockets of illiquidity.
- Reduced policy flexibility. There is limited “dry powder” to rely on in the event of a crisis because interest rates are still floored at zero or below in much of the advanced world outside the U.S., central banks’ balance sheets are already large, and debt levels are significantly higher than before the global financial crisis. This suggests that, even if there is sufficient political will, the ability to crisis manage and recover may be diminished compared to 10 years ago.
To read the full story, Subscribe Now at just Rs 249 a month
Already a subscriber? Log in
Subscribe To BS Premium
₹249
Renews automatically
₹1699₹1999
Opt for auto renewal and save Rs. 300 Renews automatically
₹1999
What you get on BS Premium?
-
Unlock 30+ premium stories daily hand-picked by our editors, across devices on browser and app.
-
Pick your 5 favourite companies, get a daily email with all news updates on them.
Full access to our intuitive epaper - clip, save, share articles from any device; newspaper archives from 2006.
Preferential invites to Business Standard events.
Curated newsletters on markets, personal finance, policy & politics, start-ups, technology, and more.
Need More Information - write to us at assist@bsmail.in