10 years later, any safer?

Friday, December 7, 2018
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istock

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It has been 10 years since the financial crisis of 2008. Is the financial system safer?

Though officials, policy analysts and economists don’t agree on much, they broadly agree that the large banks are somewhat safer than they were in 2008. And the primary reason is is simple: more capital.

Janet Yellen herself echoed this view. In a 2017 Jackson Hole speech1, she led with:

“Several important reforms have increased the loss-absorbing capacity of global banks. First, the quantity and quality of capital required relative to risk-weighted assets have been increased substantially.”

I agree. But banks don’t have nearly enough capital. The capital lesson has not percolated far enough past the big banks to small banks, the shadow-banking system, and the architecture for financial innovation. And current capital requirements continue to be a complex game will likely fail again as it did before. All the banks, even Lehman Brothers, amply met their regulatory capital requirements right through the 2008 crisis, and much fragile pre-2008 financial innovation such as special purpose vehicles and artfully tranched securities, were set up to game that era’s capital requirements.

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