"The banks we once worried about as too-big-to-fail are in many cases even bigger today"by George Magnus / February 1, 2016 / Leave a comment
The film, The Big Short, is in cinemas now—the timing of its release is spooky. Based on Michael Lewis’s 2010 book, it captures the culture of the years leading to the financial crisis of 2008, and reminds us that fraud, collusion and market abuse all thrived in an environment in which de-regulation had for many years been de rigueur. We still debate and argue who was to blame and why so few have been held to account, punished or incarcerated. But what about now?
The film’s arrival is so apposite because we have just been through a bad month in financial markets. To this can be added rising concerns over China’s economic slowdown and the consequences of a looming debt crisis; today’s Financial Times story that economists place a 20 per cent probability on another recession in the US this year; and chatter about a new financial crisis. “Surely, not again?” I hear you say, from behind the sofa.
The positive news is that banks are certainly less leveraged than they were in the build up to the financial crisis. The new focus is on their leverage ratio, or the amount of equity, or loss-absorbing, capital as a share of total assets. The minimum requirement now is 3 per cent, with some countries such as Switzerland and the US requiring banks to meet a 5 per cent requirement. Even this, alone, wouldn’t have been enough in 2008 to meet losses in every bank, but there are also new regulations that determine even higher capital requirements depending on the nature of the business.
Despite the problems in global markets, there is no mania in the housing market or in mortgage lending, as there was during the 2000s. There doesn’t appear to be any systemic fault-line as there was in 2005-08. Stress tests, resolution planning, liquidity buffers, risk management, compliance, and supervision are ubiquitous.