5 Years After Financial Crisis, Are Big Banks Still A Threat?
It's been five years since Lehman Brothers collapsed and touched off a banking crisis that is still being felt by the global economy. Today, the banking industry is a lot stronger than it was, but some critics say efforts to reform banking regulations have fallen short of their potential.
The 2008 banking crisis underscored how vulnerable the financial sector had become. Huge institutions like Countrywide were saddled with mountains of bad mortgage and consumer debt. And the losses were magnified by the widespread use of leverage and derivatives such as credit default swaps. Today, says Wayne Abernathy of the American Bankers Association, banks are much healthier and safer.
"The banking industry is so strong today, I don't see any of those risks causing systemic trauma to the economy as we had in the past," he says.
Abernathy says big banks now undergo tough stress tests to make sure they can withstand severe downturns, and they routinely pass the tests. He says banks are also much better capitalized than they were before the recession.
Even if large banks do get in trouble, Abernathy says, rules are now in place to manage their orderly liquidation. Sheila Bair, the former head of the Federal Deposit Insurance Corp., agrees that on balance, banks are probably safer than they were before Lehman. For one thing, she says, the Dodd-Frank financial reform bill put in place a mechanism to unravel big banks without government bailouts.
"Would it be easy? No. Would it be messy? Yes. But it could be done in a way that I do believe would insulate the broader economy from any problems from a large bank failure and impose the losses where they belong — on the shareholders and creditors of that large financial institution, not on taxpayers or other members of the industry," Bair says.
And yet Bair sees Dodd-Frank as a big missed opportunity. Congress left it up to regulators to flesh out the bill's provisions, and the process has become bogged down in a kind of lobbyist feeding frenzy. In an appearance on CNBC this summer, Treasury Secretary Jacob Lew seemed to acknowledge how long reform has taken.