Financial Crisis

I believe a lot has changed. I disagree profoundly with the statement that essentially nothing has changed, it’s much too simplistic. Is it sufficient? No.

Have the moral sentiments in higher classes of trading and financial management changed? No.

But is there now more capital in the system? Yes.

Is there more transparency in derivatives? Yes.

Is there more common supervision in Europe? Yes.

The whole debate became so messy because neither the thesis that everything is now good and a new crisis is unlikely is true, nor the thesis that nothing has changed. One needs to examine complex regulatory issues piece by piece.

The second important point to make is, not morally but politically, that once again the supervisory authorities have failed to discover a scandal [the CumEx scandal]. Again, a whistle-blower revealed this, not the supervisory authorities. The fact that hundreds of people, lots of major banks and other financial firms were involved, and many more must have known, yet an insider had to blow the whistle, is shocking.

Answered by: Sven Giegold, MEP

It is fair to say that people both in politics and economics seem to just accept that there will be another crisis and instead of trying to stop it from happening, they are instead trying to work out how they will handle it when it happens. It’s not a question of economics, it’s a question of politics. Reforming the system would require a lot of changes in how the system operates and there are some very strong lobbyists that don’t want this to happen.

Also, you must bear in mind that stopping a crisis from happening is not necessarily a good thing to do from a growth perspective. If you want to have no crisis at all, you can engineer that to some extent, but what are the impacts of that in terms of the long term growth of the economy? If banks don’t do much lending because you make them too safe then there may not be an adequate level of lending in the real economy. So you need to weigh the costs and benefits of these two. Different people have very different views on how costly it is for banks to issue or hold more capital. So really it’s a mixture of a political economy problem and an economic problem.
Answered by:  German Bank Official

There have been lots of reforms since 2008, particularly to do with the supervision of the financial system, eg:

• Stress tests are run every year. Every bank supervised by the Bank of England has to prove that they would be able to withstand another financial crash. The most recent stress test was much more stringent than the actual crash that happened in 2008, so we are confident that the financial system is in a much stronger position now should there be another financial crisis at some point.
• There are limits of how much banks can lend now and the most risky derivatives and products are not allowed any more. We cannot control consumer debt, though, the companies have to set limits for that. The Bank of England looks at systemic risk. We are no longer just ticking boxes, we are actually getting involved with the business models of the banks that we supervise. However, I must make it clear that we cannot stop another financial crisis from happening. the Bank of England doesn’t have that kind of power, that’s just how the system works. Eventually, it’s highly likely that there will be another financial crash, we cannot stop this. Our job is to make sure that all of our banks are able to withstand another financial crisis if and when that happens. If you look at history, the first financial crisis we can identify is the Dutch crisis with Tulips in the seventeenth century. Since them we’ve been having them It’s just a part of the system and it’s not something we can stop.If you’re not happy with the capitalist system, then you’ll have to talk to the politicians. We are accountable to the British Public through Parliament. If you want us to change the system, you have to change the government. We are accountable to the Treasury Select committee and every so often some of our representatives appear before the treasury select committee and explain our policies and mandates of financial stability. The whole economic system is dependent on lending and credit (institutions and individuals spending money that they don’t have), that is the way the capitalist system works, if you don’t like it, you need to vote for a government that opposes this.

Answered by: Bank of England

A lot has changed, a lot needs to be changed, people will always be people, history repeats itself, it will be difficult to prevent more crises.

There were actually 3 in the past decade, saying there was only one crisis is a mistake.

New developments, the point is there will always be a risk, a clear cut answer is difficult to give. We are still in a bad situation, I am reluctant to give a short answer please ask me on email.

(He never emailed us back)

Answered by: Netherlands Authority for the Financial Markets