A lesson learned should lead to meaningful changes by individuals and institutions. That has largely been the case in the decade since the financial crisis almost tipped the global economy into a prolonged depression that would have devastated livelihoods for at least a generation. But there are also consequential lessons that haven’t been sufficiently internalized; and some that were not foreseen at the time of the crisis but are now urgent and important.
Here’s a summary scorecard of post-crisis accomplishments, unfinished business and unintended consequences.
A safer banking system. Thanks to strengthened capital buffers, more responsible approaches to balance sheets and better liquidity management, the banks no longer present a major systemic risk in most advanced countries, and especially the U.S. That doesn’t mean every country and every bank is safe; but the system as whole is no longer the Achilles’ heel of market-based economies.
A more robust payments and settlement system. The strengthening of the banking system has been part of a highly successful, broader effort to minimize the risk of “sudden stops” in the payments and settlement mechanisms at the core of the global economy — that is, a loss of trust in counterparts that freezes even the most basic financial transactions, paralyzing economic interactions.
Smarter international cooperation. The crisis highlighted the importance of better approaches not just to crisis management, but also to prevention. At the top of the “to-do list” are steps such as improved harmonization of strengthened regulation and supervision, more timely and comprehensive information-sharing, and greater focus on the challenges of monitoring internationally active banks. Individual countries have been able to draw on a wider set of insights in bolstering both their macro- and micro-prudential efforts.
Still-elusive inclusive growth. It took far too long for policy makers in advanced countries to realize that the great recession caused by the financial crisis had important structural and secular components. An excessively cyclical mindset initially impeded the design and implementation of the measures needed to generate high and inclusive growth. By the time mindsets evolved, the political window had narrowed. Even today, most advanced countries have yet to adopt measures to durably boost actual growth and stop the downward pressure on potential expansion.
Misaligned internal incentives. Judging from headline-grabbing incidents of inappropriate behavior and processes in recent years, the sticks and carrots in place in some financial institutions need work. These institutions still contain pockets of improper risk-taking and other unsuitable conduct, as well as excessive short-termism in compensation payouts and managerial tolerance for actions that are too close to the line that separates permissible from non-permissible activities.