Many senior bankers have come to the 2014 World Economic Forum (WEF) meeting in Davos, Switzerland. A contentious issue at the gathering: are the financial markets safer now than before the crisis?
Banks and financial markets have become safer five years after the crisis - that's a widely shared notion among participants at the World Economic Forum (WEF) meeting. HSBC chairman Douglas Flint names a long list of details as proof: more capital, more liquidity, stricter regulation and regular stress tests.
But even HSBC, one of the world's largest banking and financial services institutions, has had to make provisions for difficult times, following specifications made by the international monitoring body Financial Stability Board (FSB) for institutions deemed systemically relevant. The more than 10,000-page document lists the steps to be taken in case of distress, Flint said. There is "virtually no other industry, perhaps apart from nuclear power" where the industry has to demonstrate how it would react "in the event of something untoward leading to the collapse of the industry," the chairman added.
Anat Admati, a professor of finance and economics at Stanford University, dismissed Flint's analogy as an attempt to make the financial crisis look like a natural disaster. "This is not a natural disaster in hardly any way at all," the US professor said. "Financial crises are man-made disasters, and the people responsible are many."
Instead, Admati compared the financial crisis with a series of severe accidents and explosions caused by overloaded trucks driving through a residential area in the fog. The only reaction was to curb the speed limit by a few kilometers, she said - nothing else changed.
Safety and capacity
Barclays CEO Antony Jenkins, however, argues that the system today is safer than it was in 2008. "It needs to be safer yet, and societies around the world need to decide through a democratic process which is already on the way, how we balance safety and soundness with capacity within the system," the British bank's chief executive said.
Banks frequently resort to the term "capacity": the higher the security constraints for banks, the fewer loans are given, which has a negative effect on the economy. Anat Admati argues it's an argument former Federal Reserve chairman Paul Volcker once termed "bullshit."
But the banks' strategy in relation with an eye on politics is successful. Just recently, in mid-January 2014, regulators eased a debt-limit rule for European banks to make sure they were not at a disadvantage versus their US competitors.
The importance of equity
The banks' main problem is insufficient equity, said financial expert Admati. "No business in the economy has the easy money that banks get to play with," she said. "The existence of banks with single digit amounts of equity is a completely unhealthy existence - that is not only a risk for the banks, but for all of us."
Where the equity quota is low, minor disruptions suffice to render banks insolvent, she said, adding that became clear in the financial crisis. The taxpayer bears the burden. Admati urged introducing requirements similar to those in place for private real estate buyers, which means the banks' equity should equal 20 to 30 percent.
It's unlikely, however, that this will ever be realized. In the coming years, the quota is expected to be raised internationally from two to seven percent - which is regarded as regulatory success.
Taxpayers, savers, pensioners
By no means does she hate banks, Admati said - quite the contrary, since more equity strengthens banks. HSBC chairman Douglas Flint argues, however, that such stabilization comes at the expense of the shareholders, who receive lower yields from their capital. That not only concerns major investors but also people who invest their retirement money in pension funds.
"When policy makers say never again must the taxpayer be called upon, that is a wonderfully seductive sentence for the public," Flint said. "Until you finish the sentence: Never again will the taxpayer be called upon, because we have hardwired the losses into your pensions and savings."
Admati remains skeptical - but she no longer needs to quote Paul Volcker. Last year, the Stanford professor and German economist Martin Hellwig published their own version of the problem: The Bankers' New Clothes: What's wrong with banking and what to do about it.