After '08 Meltdown, Banks Still Play With Financial Fire
It’s been a decade since the global financial crisis rocked the world. In the years since 2008, the U.S. and other countries put together the pieces of their broken economies, assessing what went wrong and trying to curb the abuses that could lead to another crisis. But today many factors that contributed to the implosion still pose a threat.
Although Wall Street may not go gaga over home loans as it did leading up to the last panic, it’s only a question of time before the next speculative frenzy hits. Even with regulations in place, competition and greed push Wall Street to find a new way to get rich quick. And when it does, these four factors will make the ensuing financial crisis all the worse.
1. Big banks hold even more assets than before the crisis
One of the contributing factors to the 2008 global financial crisis was that so few banks owned so many assets. The top five banks owned nearly 45% of financial assets leading up to the crisis, and they own slightly more today (more than 46%). The top 10 banks control more than 55% of total assets. America’s approximately 5,700 other banks control the remaining 45%.
Concentration in itself is not worrisome. There’s no reason big banks can’t keep making smart decisions. But concentration of assets becomes catastrophic when those banks are all doing the same (dumb) thing, such as writing poor loans or gambling against the value of homes via sophisticated insurance contracts (credit default swaps). Then other smart financial institutions are not large enough to step in and bail out the failing ones. So the government has to intervene.
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After ’08 Meltdown, Banks Still Play With Financial Fire
James Royal, Ph.D. 5 hrs ago
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It’s been a decade since the global financial crisis rocked the world. In the years since 2008, the U.S. and other countries put together the pieces of their broken economies, assessing what went wrong and trying to curb the abuses that could lead to another crisis. But today many factors that contributed to the implosion still pose a threat.
Although Wall Street may not go gaga over home loans as it did leading up to the last panic, it’s only a question of time before the next speculative frenzy hits. Even with regulations in place, competition and greed push Wall Street to find a new way to get rich quick. And when it does, these four factors will make the ensuing financial crisis all the worse.
Are we 10 years wiser? See more tips on preparing — and prospering
1. Big banks hold even more assets than before the crisis
One of the contributing factors to the 2008 global financial crisis was that so few banks owned so many assets. The top five banks owned nearly 45% of financial assets leading up to the crisis, and they own slightly more today (more than 46%). The top 10 banks control more than 55% of total assets. America’s approximately 5,700 other banks control the remaining 45%.
Concentration in itself is not worrisome. There’s no reason big banks can’t keep making smart decisions. But concentration of assets becomes catastrophic when those banks are all doing the same (dumb) thing, such as writing poor loans or gambling against the value of homes via sophisticated insurance contracts (credit default swaps). Then other smart financial institutions are not large enough to step in and bail out the failing ones. So the government has to intervene.
And whereas the banks may steer clear of speculative excess today, competition virtually ensures that, eventually, Wall Street will do dumb things again.
2. Banks retain high leverage
The banking sector is particularly prone to blowups because it uses a lot of debt (i.e., leverage), writing large loans against a small down payment. This is normal for the industry and is not especially worrisome, if banks are operated prudently. Here’s how the situation stacks up now versus 2008. Banks are using just a bit less leverage than previously (a higher percentage means less leverage).
During good times leverage works wonders, because it rapidly increases the bank’s profitability. That’s why banks would like to use more leverage. But leverage does the opposite in bad times. When the value of houses plummets, banks are required to write off that value on their books, making the bank even more leveraged. If leverage keeps rising, the bank effectively becomes bankrupt. That’s why there is stringent regulation surrounding how much leverage a bank can take on, and why further regulations were developed in the aftermath of the crisis.
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https://www.msn.com/en-us/money/markets/after-’08-meltdown-banks-still-play-with-financial-fire/ar-BBKPTNz?li=BBnbfcN
