Ten years on if you are wondering will there be another Lehman Brothers corporate collapse, the likely answer is no, but the same can’t be said for a potential financial crisis.
Former UK Prime Minister Gordon Brown believes that the problems that caused the financial crisis remain unresolved and tougher action is needed to prevent wrongdoing by bankers.
Brown’s prognosis gets worse. He tells The Guardian in an interview to mark today’s 10th anniversary of Lehman’s collapse that “we are in danger of sleepwalking into a future crisis.”
With respect to the last Labour PM, I disagree on both counts.
Will there be another Lehman Brothers? No, due to the following lessons learned
After the financial crisis, G7 leaders all agreed that never again should failing banks be rescued by the taxpayer. Banks across the globe are far healthier today than they were in 2008. In particular, tougher rules apply on liquidity, capital and leverage. Just one example is the Basel Committee on Banking Supervision and major changes to the prudential regulation of banks via the Basel III reforms.
The majority of the major banks now hold up to four times as much capital than they had a decade ago. And it is capital of a higher quality. UK banks have raised around £100bn of addition ‘Tier 1” capital since 2008 so they are about three times stronger to absorb losses.
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Culture and ethics
There is an argument that more needs to be done but much has changed. There is less short-termism as witnessed by changes to bank executive remuneration, or ‘compensation’ as gratingly bank execs on seven figure salaries insist on describing their pay packages. Bonuses now can be clawed back but campaigners continue to argue that claw-back provisions need to be beefed-up.
Banks are slowly waking up to the need for greater diversity at the top and will benefit from more women in the boardroom. Progress is however slower than ideal and remains a work in progress.
Central banks are stronger
Central banks around the world were transformed as a result of the crisis. Many of the essential decisions taken post-Lehman were hugely unpopular, such as the TARP programme in the US. The TARP programme alone resulted in 700 US banks receiving $426bn. Interest rates were slashed to negative rates and savers lost out while bankers continued to reward themselves with mega bonuses. No wonder the programme was unpopular.
Next up the central banks gorged on government and corporate bonds to stimulate the economy via quantative easing. It was all necessary to underpin the global economy but distorted bond markets and all the time, wages were falling in real terms.
However unpopular many of their decisions were at the time, central banks today are immeasurably stronger than they were in 2008. They are also better equipped to avoid a repeat of a bank collapse of Lehman proportions.
Brown spot on re geopolitical risk
Gordon Brown is however spot-on to suggest that politically, the world is a riskier place than in 2008. Governments around the world generally worked well to tackle the economic tsunami of the Lehman collapse.
Can anyone seriously suggest that President Trump would be the ideal leader to encourage cooperation between the US Fed, the Bank of England and European Central Bank in any future crisis?
Brown is correct in his assessment that growing protectionism and populism witnessed by xenophobic trade disputes is not a recipe for sustained financial stability.
It is almost inconceivable that politicians and regulators will be so careless as to allow a bank of the size of Lehman to collapse in the manner of the 15 September 2008 failure.
But with global debt hitting an eye-watering $169trn last year, up from $97trn at the time of the crisis and fragile international relations, there is no room for complacency.
The chances are that the next crisis will not be a Lehman type event but will relate to risks not near the top of the agenda in 2008.
Such possible examples is a long list but most likely to relate to cybercrime, risks from crypto-currencies or misuse of AI and big data.