On 15 September 2008, banking heavyweight Lehman Brothers, knocked sideways by the bursting of the sub-prime mortgage bubble a year earlier, declared itself insolvent with 613 billion US dollars’ worth of debt. This whipped up a storm that raged through Wall Street, spreading distrust and toppling other large institutions. Stock markets crashed, the credit market dried up and the real economy suffocated. The gangrene then spread to the eurozone – causing several member states to totter under the weight of public debt – and eventually to the rest of the world. Ben Bernanke, the Fed Chairman at the time, has even said “September and October of 2008 was the worst financial crisis in global history, including the Great Depression”.
With the ‘too big to fail’ dogma and financial market self-regulation in tatters, authorities, in full interventionist mode, mobilised to contain the blaze. It became abundantly clear that the only way the worldwide financial system could pull through this crisis caused by its own excesses would be by drastically revising how it functioned and was regulated. So in London in April 2009, and the following September in Pittsburgh, the G20 agreed on the need to reform the financial system and increase international cooperation.
That was ten years ago. While some well-meant plans never came to fruition, the world of finance has undeniably been completely reshaped by the regulatory overhaul. This reform has been twofold: on the one hand, supervision of financial institutions has been strengthened in order to contain the spread of bad debt and risk of bankruptcy, and on the other hand, transparency and protection has been improved for investors, in particular for retail clients, the collateral victims of the crisis.
The resulting Basel III Accords, adopted at the end of 2010, impose stricter liquidity requirements on banks and prudential rules to improve the quality of their capital. In the US, the Dodd-Frank law signed in 2010 by Barack Obama, regulates derivatives and speculative trading by investment banks while offering consumers and borrowers better protection, although it has since been watered down by Donald Trump.
Meanwhile in Europe though, the Banking Union that was initiated in 2014 to make the sector more reliable and address incidents without using taxpayers’ money remains on track. MiFID II, under which investment service-providers have to take their clients’ risk profiles into account when offering them solutions, entered into force in early 2018. And in Switzerland, the Financial Services Act (FinSA) and Financial Institutions Act (FinIA) lining up Swiss regulations with EU law have just been adopted by Parliament (in June).
Add to that the worldwide push towards tax transparency, with FATCA in the US and the OECD’s Automatic Exchange of Information agreements, and you have a completely revolutionised banking industry. Every financial institution has seen its margins squeezed by the new regulations, whether it was been saved with public money or survived under its own steam. They have all had to comply, invest and find new growth drivers in order to stay afloat. Now that the regulatory storm seems to have blown over, it looks like most of the sector has finished adapting. Another sign that things are going back to normal is central banks’ gradual unwinding of the unconventional measures they had deployed to curb the crisis.
After the crisis, regulators strengthened supervision of financial institutions and improved protection for investors
A lost decade
Yet it would be a mistake to think that the scars of the most serious crisis of the century are fading already. Firstly, there is no knowing how the patient will react to the treatment ending after years on an intravenous drip. Secondly, some wounds inflicted in 2007 and 2008 have yet to heal. Furthermore, as historian Adam Tooze points out in his recent book describing the years following Lehman’s collapse*, the Great Recession has also had a profound effect on international relations and altered political balances.
As many voters see it, the past decade seems like a lost one: after having been expropriated, forced into unemployment, and seen their savings waste away, they feel doomed to chronic financial insecurity. Populists, whether right- or left-wing, have jumped on the chance to capitalise on this disillusionment. Having made it to power in several countries, they are now leading a movement towards isolationism and protectionism, and how far this will go is impossible to gauge at this stage. That is the latest toxic legacy of the 2008 crisis.
*Crashed: How a Decade of Financial Crises Changed the World, Adam Tooze, Penguin, August 2018
CEO Private Banking