12 September 2023

Finance Watch's Grandjean, Symon: #NoMoreCrises: Unkept Promises of Reform

Fifteen years after the GFC, authorities are still forced to repeatedly syphon out hundreds of billions of already scarce public money to prop up failing institutions. European legislators must reawaken their 2008 ambition and finalise the post-crisis “never again” financial reform agenda.

The true cost of the 2008 crisis

As authorities only just prevented a 2023 repeat of the 2008 crisis, it is worth reminding ourselves of the cost of the 2008 financial crisis to European citizens:

• EUR 2 trillion of State Aid was allocated to the financial sector, that is around EUR 3,800 for every single EU citizen – man, woman and child.
• In only three years (2007-2010) public debt across the EU-28 rose by more than 20%, from 57% to 79% of GDP, due to the financial crisis.
• The following Euro crisis impaired real GDP growth for a decade, with no or even negative economic growth for some Member States.
• Meanwhile, unemployment jumped with youth unemployment remaining stubbornly high for much longer. Real disposable incomes, too, was depressed for years.
• The rescue of the financial sector has exhausted EU countries’ fiscal capacity, limiting the subsequent government support to the real economy.
• Following 2008/09, the international community’s fiscal and monetary arsenal for dealing with another global financial crisis has been depleted.

In the face of such enormous cost, global policymakers promised to strictly regulate the financial system to remove the Damocles sword of financial crises, in order to end moral hazard and remove the need to inject public money when financial institutions fail.

And yet…

Few lessons from 2008 were learned

In March 2023, the domino collapse of American and Swiss banks forced financial authorities to once again pour public money into the financial system. It was the only way to avoid a full-scale new global financial crisis.

Finance Watch and many experts have been raising the alarm for years: We have not drawn lessons from 2008, just as a decade of monetary easing across most major developed economies has left the world with unprecedented levels of public and private-sector debt.

None of the structural vulnerabilities that led to the financial crisis of 2008 has been tackled in a decisive way in the midst of a massive deregulatory backlash: already feeble international compromises (for example, Basel III) have been watered down and supervisory authorities de-fanged.

The third line of defence became the first

The injection of public money, whether via central bank or public budget intervention, is the last measure in three lines of defence to contain bank runs and systemic crises.

The first two lines of defence – prudential regulation and resolution frameworks – that were put in place to protect society from banking crises failed. In 2023, once again, the third line of defence effectively became the first.

Market participants don’t trust the first two lines of defence because they are not solid enough, meaning moral hazard remains the dominant principle in banking. This implicit public subsidy will incentivise risky behaviour by private actors leaving the risk of catalysing into uncontrollable financial crises at tremendous costs for society. Privatise the market profits, socialise the losses: everything but a financial system that serves society.

Reforms to “fireproof” the house

Public authorities throwing money at failing institutions are the third line of defence against financial instability. They can be compared to much needed fire-fighters, but it’s crucial to avoid fires in the first place. We urgently need to fireproof the house for good. Let’s extend the fire metaphor:...

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