Taking care of business: given the glacial pace of financial reforms since the GFC, it is not unreasonable to expect another crisis of the same magnitude. _Davo_

An article by Jikon Lai, from The Conversation

“It has been five years since the sub-prime mortgage crisis emerged in the US. This was followed by financial institutions suffering liquidity shortfalls in both US and Europe, and their eventual collapse or public rescue.

“What started off as a financial crisis in a limited number of economies affected the broader economy and other countries through the complex linkages of our contemporary global economy. The cost to the general public has been multifold: repossession of homes, job losses, and depreciation in value of investments among others.

“Given the extent of the pain that many suffered, there were strong incentives to address shortcomings in the financial sector. Although corrective measures have been adopted in the last five years, progress has been slow and somewhat limited in nature. In light of actual outcomes, we can only conclude that we have a case of business as usual and that another financial crisis will soon reappear.

“Modest progress

“There was broad consensus at the height of the crisis that three main issues required further attention at the domestic level. One: improving regulatory and supervisory structures over the financial sector. Two: tightening the regulation of activities that financial institutions can conduct. Three: addressing the incentive structure for risky behaviour in the financial sector (e.g. bonuses). Progress on all fronts has been modest.

“Let us focus, on developments in the US — the “genesis” of the current crisis and home to the most important financial sector in the world.

“Regulators have recognised the importance of shifting their focus from “micro-prudential” (firm level) to “macro-prudential” (system level) regulation. However, there is still a lack of clarity on how this might be implemented and whether regulators would actually be able to identify systemic weaknesses.

“An overarching Financial Stability Oversight Council was created to better facilitate ‘macro prudential’ supervision. But there are signs that actual implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010) is paradoxically fragmenting the division of labour in supervision.

“In addition, in the process of implementing the Dodd-Frank Act, a new raft of complex regulations were created, which are likely to serve as incentives to financial institutions to avoid regulation by shifting activities to as-yet unregulated areas.”

Click here to continue reading this article from The Conversation.