What caused the financial crisis? Does anyone actually know? Was it lack of regulation or de-regulation? Or, was it lack of understanding of the significance and the complexity of the securitisation markets?
There have been many thought-provoking articles on the ‘financial crisis – 10 years later’ subject. Scholars, agencies and journalists write of the great remedial achievements and of the flaws and risks in equal measure. The truth is, that even ten years after the event, we’re hard-pressed to identify one root cause.
However, what we do know is that post-crisis regulatory reform has affected all corners of the global financial system. The primary objective was always to reduce the risk of another systemic failure and the spill over to the broader economy. These remedial measures (and there are a fair few of them) were reactively implemented as the crisis unfolded and the risks continued to surface.
One of the most significant pieces of legislation came from the US: The Dodd-Frank Wall Street Reform and Consumer Protection Act, the first legislative measure implemented as an immediate response to the crisis. At a higher level and more recently the Basel Committee has set out the implementation of a new global framework for robust prudential regulation. At a transactional level, a plethora of regulation has resulted in the capital markets operating in a more transparent and secure environment using organised markets and central counterparties. Additionally, the bank bailouts issue has resulted in sweeping reform on bank bonds which places the risk of failure on the investor (and their pension funds) rather than the taxpayer. In the UK, mortgage regulation has been tightened up so that borrowing limits are controlled by earnings level.
But at what price?
Securitisation markets in Europe, the area most heavily linked to the crisis, together with market and capital liquidity, have significantly shrunk due to the new restraints and regulatory provisions. The implementation and the rules themselves have also placed an increased regulatory burden on the institutions and in turn, additional cost – both in monetary terms and time spent in fulfilling these new obligations.
Moving away from the rear-view mirror
It is hoped however, that in the post-reform phase that we are now approaching, some regulations may be modified or rolled back to reduce such burden on the smaller institutions. Indeed, this is happening; for example, the Trump administration is already lifting some of the burden on small and medium-sized firms in a new Act aimed at rolling back some of Dodd-Frank. Similarly, it is a time of great opportunity for technology to become strategic partners with the financial services industry to provide more scalable efficiency to handle the operational burden from regulation and to fully support the industry in an agile and a more real time world.
While it’s fair to say the Basel Committee on Banking Supervision have created what appears to be a robust global framework to govern global institutions, it is critical that the transposition of the rules into national law are consistent and should be monitored to ensure loopholes are identified and risk does not migrate towards opaque or unregulated areas of financial services and markets.
A thought to finish on is found in a report by the G30 Steering Committee and Working Group on Emergency Mechanisms and Authorities highlighting that crises usually occurs from risks and sources not yet identified. Will these preventative regulatory measures stop the next crisis? Only time will tell.