What if all the efforts to overhaul the financial sector in the wake of the crisis had yet to make us safer? What if, far from behaving themselves, the bankers and financiers involved in the last collapse were up to their old tricks again?
If this were the case it would, you might reasonably assume, be the ultimate nightmare for the regulators and politicians charged with overhauling the world’s financial system. However, according to a report published by the International Monetary Fund today, that is precisely what has happened since 2008.
As part of its Global Financial Stability Report, the Fund has analysed the impact of many of the new regulations set up in the wake of the crisis. Its conclusion is that not merely have the reforms “yet to effect a safer set of financial structures”, some banks are already devising complex structures to avoid paying heed to the new regulations.
The report, a pre-released chapter from the GFSR, the rest of which will be published next month, says: “despite improvements along some dimensions and in some economies, the structure of [financial] intermediation remains largely unchanged. The data suggest that financial systems are still overly complex, banking assets are concentrated, with strong domestic interbank linkages, and the too-important-to-fail issues are unresolved. Innovative products are already being developed to circumvent some new regulations. These same traits have been linked to the crisis, suggesting financial systems remain vulnerable.”
This chart, from the report, shows that the size of the global financial system has increased in nominal terms since the onset of the crisis – although in real, inflation-adjusted, terms it has shrunk.
One of the main concerns that surfaces from the IMF’s research is that because banks are now being more heavily-regulated, financiers are instead putting more money into the less-regulated “shadow banking system”. It also warns that the banks in some countries – especially the UK – are still excessively reliant on supporting themselves with funding from wholesale markets. In fact, it adds that in the UK the reliance on wholesale funding, in which a bank finances itself using short-term loans from the Interbank market – has actually increased.
You can see the evidence for this in this chart, which shows the levels of non-bank financing in certain economies around the world.
The report is likely to be seen as a wake-up call from the Fund to economies around the world that unless they reform their financial systems they risk a recurrence of the events of 2008, in which the collapse of investment bank Lehman Brothers triggered a crisis around the world. Although the report’s authors write with approval of plans such as those recommended by the Vickers Commission in the UK and by former Federal Reserve Chairman Paul Volcker in the US, it says that for the most part they and their international counterparts have yet to be implemented.
It concludes: “reforms in some areas still need to be further refined, far more work needs to be done to implement them, and that the system, in many cases, remains vulnerable, overly complex, and activities are too concentrated in large institutions. Reliance on non-deposit funding is very high, linkages across domestic financial institutions are very strong and complex financial products are taking on new forms.”
This article is also available on the Sky News website.