Banking crisis, stock market crash, GDP collapse: the bankruptcy of the US investment bank Lehman Brothers in autumn 2008 had immense consequences. How deep the shock is can still be seen 15 years later.
“Lehman 2.0” – whenever a crisis comes to a head, the comparison with the fall of 2008 is not far off. 2020 Corona pandemic: Is the virus hitting the economy more devastatingly than the financial crisis of 2008/2009?
2021 Evergrande: Is the Chinese real estate giant’s difficulties starting a downward spiral? 2023 Silicon Valley Bank and Credit Suisse: Are the problems of regional US banks and the emergency takeover of the second largest Swiss bank the beginning of a global crisis? The bankruptcy of the US investment bank Lehman Brothers on September 15, 2008 is deeply etched in the collective memory. However, a lot has changed in the 15 years since then.
The financial world is in a state of shock
Flashback: After a dramatic weekend with negotiations deep into the night, it was clear on a Monday morning in September 2008: the rescue of the globally networked US investment bank Lehman Brother had failed. The state is abandoning a 158-year-old bank that was actually considered too big to fail. Images of bankers carrying their belongings stuffed in boxes out of a New York office tower are circulating around the globe. The financial world, which has been alarmed for months because of the US real estate crisis, is in shock and the global economy is on the brink of collapse.
Governments are hastily putting together rescue packages worth billions, and the major central banks are jointly lowering interest rates in an emergency action. The states of the European Union alone pumped around 1.6 trillion euros into struggling banks in the months after the Lehman bankruptcy. The expensive fire service just prevents the worst from happening, even if the economy collapses and the downward pull drags other financial institutions into the abyss.
Better regulation and a strengthened financial system
After the big crisis, the big clean-up begins: More control and stricter rules should make the closely interconnected financial world more crisis-proof. In general, financial institutions are now obliged to hedge risks with more of their own capital. The institutions in both the USA and Europe regularly have to prove in stress tests that the buffers would be sufficient even in the event of extreme crisis situations.
The Europeans are also relying on a triumvirate of central banking supervision, common rules for the restructuring and, if necessary, closure of banks, and cross-border protection of bank customers’ balances. But while the new Euro banking supervision (“Single Supervisory Mechanism”/SSM) under the leadership of the European Central Bank (ECB) has been established since November 2004 and the common European bank resolution (“Single Resolution Mechanism”/SRM) since the beginning of 2016, the common one is failing EU deposit insurance still faces resistance today – including from Germany with its comparatively well-filled emergency pots.
Nevertheless, the conclusion from supervisors is positive. Since the financial crisis of 2007/2008, the global financial system has become more stable, said the President of the German financial regulator Bafin, Mark Branson, in May 2023, in view of emerging concerns at the time that the series of bank failures in the USA could be the beginning of a new global systemic crisis.
“We’ve done a lot, but we’re not done yet,” Branson said. “In my view, we have to ensure that the difficulties of a smaller or medium-sized institution no longer trigger unnecessary fears of infection.” In addition, large, systemically important banks would also have to be able to be wound up in the event of difficulties. “This was a central concern of the reforms after the 2007/2008 crisis. Never again should an institution be too big to fail. We must not give up on this goal,” warned the head of the Federal Financial Supervisory Authority (Bafin).
Challenges in implementing international standards
However, despite all political statements, enforcing international standards for the financial industry is anything but easy. The implementation of the banking reforms passed in 2017 – known in technical jargon as “Basel III” and “Basel IV” – has been dragging on for years. Under President Donald Trump, the USA even relaxed regulations for medium-sized banks.
In light of the latest developments, the Financial Stability Council warned the finance ministers and central bank governors of important economic nations (G20) in April 2023: “The complete, timely and consistent implementation of international financial standards remains the key to strengthening global financial stability.” The international Financial Stability Board (FSB) is intended to identify weak points in the global financial system, make suggestions for eliminating them and monitor their implementation.
The anxious question hanging over everything is: Can a case like Lehman happen again? Overall, Europe’s major banks survived the latest stress test better than they did the crisis exercise two years earlier. Assuming an intensification of geopolitical tensions plus a resurgence of the corona pandemic, financial institutions would have to cope with losses of 496 billion euros within three years. Although their capital buffers would shrink by 271 billion euros, the banks could still support the economy even in such a serious economic crisis, the European banking regulator EBA found – even though the EBA says it has never simulated a crisis scenario as severe as this in the 2023 stress test.
Source: Stern
