The collapse of Lehman Brothers in September 2008 was a seismic event, not just for the banking industry but economically and politically. It crystallised, graphically, one of the most dramatic financial crises in modern times. Within 9 months of the crisis I was at the heart of Number 10 seeing at first hand the internationally coordinated efforts to limit the damage of the global financial crisis. These efforts came together first at the G20 summit meeting in London, skilfully chaired by Gordon Brown, and then at the G20 in Pittsburgh in September that year.
Many of the reforms agreed at Pittsburgh have underpinned and driven much-needed reform of the banking industry over the subsequent 10 years.
Banks are now better capitalised, better managed, with more pre- and post-trade transparency. Banks trading on own accounts has been substantially curtailed although position taking to support liquidity and risk management still has an important role to play. Remuneration levels and compensation have been realigned more closely with shareholder interests. There is also much more global regulatory information sharing and coordination.
One of the effects of the G20 reforms has been the changing competitive landscape, as the US banking sector emerged more quickly and stronger from the effects of the crisis while the European banking industry has been slower to return to full fitness. For example, the largest US bank has a market capitalisation that is more than double any EU-based bank.
Perhaps the big political fallout from the crisis of 2008 was the “too big to fail” problem and the collateral damage from the perception that the taxpayer bailed out the banks in the US, UK, the Netherlands and other European countries. The long-term effect of this has been a significant and, in some ways, dramatic loss of trust both in the regulators and in the industry itself.
As we look back over the last 10 years it is important to recognise that much progress has been made on the “too big to fail” problem. There is now a comprehensive and effective bank resolution regime in place in the UK and Europe. Banks are much less likely to fail, and where they do so, any losses are expected to be borne by bank investors rather than taxpayers. Authorities now have the power to deal with a failing bank that they simply did not have 10 years ago. This was clearly illustrated in the collapse of Spain’s fifth-largest bank, Banco Popular, in 2017. Financial markets and regulators reacted calmly to the bank’s demise, showing that the mechanisms created in the wake of the 2008 crash are working well.
Banks are also continuing to build up loss absorbing capacity to further strengthen their resilience and enhance resolvability; the framework itself still being revised by policymakers. This will tackle the continuing concern of the possibility of the taxpayer being forced to bail out failing banks in either Europe or the US.
Culture and conduct has also been a major focus of change since Lehman’s collapse. This is an area which cannot really be regulated, although the Senior Manager’s Regime in the UK has been very helpful in creating a culture of individual accountability, particularly in global institutions with complex cross-border responsibilities. However, culture and conduct changes need to come from within and here the signs are also promising. There are new styles of management, greater professionalism, and a real willingness to change.
The political damage of 2008 has reverberated significantly and the loss of trust in banking is profound. It is quite clear that although there is more of a dialogue politically than there was, the political goodwill that does exist is, understandably, paper thin. But banking is too important an industry for economic success and prosperity not to have a voice in public policy. A vigorous, innovative and profitable financial sector helps consumers and households to save and invest, businesses to expand, and provides the means to fund infrastructure and trade.
The significant next big challenge for the industry is to find a way of restoring public and political confidence. This is necessary for a well-functioning, well-managed and well-regulated, banking sector that is able to serve the needs of the economy and its customers over the long-term.
This opinion was first published in The Daily Telegraph on 12 September 2018