Reforms are building a safer, simpler and fairer financial system, FSB chairman and Bank of England governor tells G20 leaders.
Fundamental reforms undertaken since the US sub-prime mortgage market triggered the deepest global recession since the second world war have created a safer, simpler and fairer financial system, Mark Carney has said.
With the 10th anniversary of the financial crisis next month, Carney said the world’s biggest banks were stronger, misconduct was being tackled, and the toxic forms of shadow banking were no longer a threat.
Carney, as well as being governor of the Bank of England, is chairman of the Financial Stability Board, a body created by the G20 group of developed and developing nations in 2009 to recommend ways of remedying the flaws in the system highlighted by the crash.
In a letter to G20 leaders before their meeting in Hamburg later this week, Carney said: “A decade after the start of the global financial crisis, G20 reforms are building a safer, simpler and fairer financial system. The largest banks are considerably stronger, more liquid and more focused.”
The FSB chairman said there were still issues to be addressed, such as the risks posed by developments in financial technology (fintech) and the increased vulnerability of digital systems to cyber-attack.
But at a press conference in London on Monday, Carney said: “We have fixed the issues that caused the last crisis. They were fundamental and deep-seated, which is why it was such a major job.”
The financial crisis of 2007 began in the US mortgage market but rapidly went global as it emerged that banks and unregulated shadow banks were massively exposed in the market for derivatives and did not have enough capital when losses started to mount.
Public anger towards the financial system grew when the biggest banks were bailed out by taxpayers because they were deemed “too big to fail”.
Carney said in his letter: “The largest banks are required to have as much as 10 times more of the highest quality capital than before the crisis and are subject to greater market discipline as a consequence of globally agreed standards to resolve too-big-to-fail entities.
“A decade ago, many large banks were woefully undercapitalised, with complex business models that relied on the goodwill of markets and, ultimately, taxpayers. A decade on, the largest banks have raised more than $1.5tn of capital, and all major internationally active banks meet minimum risk-based capital and leverage ratio requirements well in advance of the deadline.”
He added that on the eve of the crisis a decade ago, “enormous risks were built up outside the core banking system and away from effective supervision with devastating impact on the real economy”.
As a result of measures agreed four years ago to toughen up regulation, Carney said “the financial stability risks from the toxic forms of shadow banking at the heart of the crisis no longer represent a global stability risk”.
The FSB is monitoring the rapid growth of the asset management industry, with particular emphasis on the vulnerability of emerging and developing countries to sudden outflows of funds.
“Despite this immense progress, there are nascent risks that, if left unchecked, could undermine the G20’s objective for strong, sustainable and balanced growth,” Carney said. “In particular, giving into reform fatigue could erode the willingness of G20 members to rely on each other’s systems and institutions and, in the process, fragment pools of funding and liquidity, create inefficiencies and frictions, reduce competition, and diminish cross-border capital and investment flows.”
