Where to from here?

Have we really learned the lessons of Lehman Brothers?

This article was first published on the Financial Times website on 10 September 2018.

Given its seismic consequences, it would be natural to assume fundamental change in the global financial system post-Lehman.

Yet just last year Stéphane Monier, chief investment officer at Lombard Odier, said the debt data suggested humanity “hasn’t learnt all that much”. It is a sobering fact that in every single major economy, debt as a percentage of GDP has risen significantly since 2007. Overall debt levels now represent over twice the world’s Gross Domestic Product – 217 per cent vs 179 per cent in 2007, according to data from the Bank for International Settlements.

And on a global level, improvements to regulatory oversight are incomplete. The US’s Dodd-Frank Act, designed to avert another financial crisis, is not the panacea required. For example, it has increased restrictions on lending by the Federal Reserve, making it harder for the Fed to act as lender of last resort.

More importantly, the regulatory response has not been sufficient to restore public opinion in the financial system. The biggest regret I've got is that life is going to be much more difficult for any regulator sitting in the seats facing another crisis, because what we did was so unpopular,” said Hank Paulson, who was Secretary of the Treasury under George W. Bush.

“I stand guilty of not being able to explain why the financial system was good for Americans.”
The new compliance challenge

But it’s not all doom and gloom. Etienne Dessy, Financial Regulation Partner at Linklaters in Brussels, says: “A number of the reforms have been welcomed. For the first time, financial institutions with an EU-wide footprint are now supervised by an EU body.”

Conceptually, it made sense to give the EU regulators greater supervisory powers but there are challenges with how it works in principle. Dessy points to decisions potentially taking longer than if a national regulator has sole oversight.
 
However, increased regulation means there is now much more focus on keeping proper records, regular reporting to regulators and, importantly, also to senior managers to verify and establish that banks can meet their obligations.

Stefaan Loosveld, Dispute Resolution Partner at Linklaters in Brussels, says: “The impact of the regulation has been huge. It is a real challenge for financial institutions to stay on top of it all and ensure they are complying with all the areas.”

Seeking a better balance

We’re not at the end of the regulatory road though as there is more that still needs to be worked through as regulators continue to learn the lessons of the financial crisis.

But Andreas Steck, Financial Regulation Partner at Linklaters in Germany, warns there may be a limit to how much is sustainable. He says:

“The regulatory response in Europe was, on the whole, the right approach, but you need to carefully balance how much you force on the banks and at the same time ensure they remain attractive to investors. We’re at the edge now, there’s not much more room to push further.”

Whilst no one can predict where the next crisis will come from, there is hope that with all the progress made, the buffers put in place, and the regulations imposed, we should be in a better place if another Lehman’s were to go under tomorrow.