x Abu Dhabi, UAESunday 21 January 2018

Credit crisis lessons haven’t been applied

Five years after the Lehman Brothers collapse, it would be reassuring – but not quite accurate – to think that another global financial crisis could not happen.

Lehman Brothers was the fourth-biggest investment bank in the US, until it collapsed into bankruptcy in September 2008 – and that event is now seen as a pivotal event in the economic train wreck that became known as the global financial crisis.

Half a decade later, questions persist about the disaster and its effects. It brought about, according to a branch of the US Federal Reserve Bank, “a huge downshift in the path of economic output, consumption and financial wealth”. Estimates of total losses range well into the trillions of dollars. But have we learnt anything from these cataclysmic events?

There is certainly blame enough to go around, for reckless individual investors and regulators in the US and elsewhere, avaricious bankers and fund managers and lax global supervisory institutions.

Five years on, only some of the flaws in the structure and operations of banking and finance have been patched, and sometimes only partially.

On the positive side, it is apparent that the world’s banks are sounder than they were, having raised an additional $500 billion (Dh1.8tn) in capital as they move towards compliance with the global standards known as “Basel III”; even stricter Basel IV rules are being developed.

But many experts note that banks, in the US and elsewhere, continue to fish for profits in the dangerous waters of unorthodox markets where regulators cannot easily follow.

The banking industry has used its considerable political clout to resist some proposals to rein it in. And a worrisome proportion of the world’s big banks are still “too big to fail”, a natural invitation to the “moral hazard” of irresponsible behaviour.

The euro zone’s financial problems, sparked by the 2007-08 crisis, exposed a structural problem in the European Union that has not been repaired. Perhaps the best thing that can be said about Europe’s banks and budgets is that EU leaders have become adept at muddling through from one crisis to the next. Real structural reform is still too big a political challenge.

Could it all happen again? It could. It’s not even over, in the sense that global economic growth is still distressingly anaemic. It would be reassuring to think that the ordeal we’ve all been through will make the next crisis less likely, or at least less severe. But the reality is that we have not yet applied the lessons learnt at such a cost.