Ten years after the collapse of Lehman Brothers kicked off the global financial crisis, the financial system still isn't “safe enough” says International Monetary Fund chief Christine Lagarde - and had a woman been in charge of the investment bank, the whole crisis may have been averted.
In a blog post about lessons learnt from the GFC and the challenges that lie ahead, Ms Lagarde says having more female leaders in finance would lead to more prudence, and less of the reckless decision-making that had provoked the crisis.
"Our own research bears this out—a higher share of women on the boards of banks and financial supervision agencies is associated with greater stability,” she wrote.
“As I have said many times, if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today.”
September 15 will mark the 10th anniversary of the collapse of investment bank Lehman Brothers that sparked the global financial crisis.
In hindsight, the warning signs leading into the GFC seem obvious, but they had been missed by most economists at the time, Ms Lagarde said.
While there had been a "frenzy of reckless risk-taking” by financial institutions in the United States and Europe, economists failed to predict what was coming because of “groupthink”.
As I have said many times, if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today.Christine Lagarde
The fallout were “heavy economic costs borne by ordinary people combined with the anger at seeing banks bailed out and bankers enjoying impunity, at a time when real wages continued to stagnate”. And the reverberations are still being felt today, Ms Lagarde said, pointing to a study that suggests the average American will lose $US70,000 in lifetime income because of the crisis.
The heavy costs of the crisis for ordinary people was a key reason why there was such a backlash against globalisation and the erosion of trust in government and other institutions, the IMF chief said. To prevent such a crisis from happening again, a “key ingredient” would be having more female leaders in finance, she argued.
“First, greater diversity always sharpens thinking, reducing the potential for groupthink,” she said. “Second, this diversity also leads to more prudence, with less of the reckless decision-making that provoked the crisis.”
'Profit over long-range prudence'
Ms Lagarde said that while changes had been made to improve the global financial system, an area that "has not changed much" is culture, values and ethics.
“The financial sector still puts profit now over long-range prudence, short-termism over sustainability,” she said. “Just think of the many financial scandals since Lehman.”
The financial sector still puts profit now over long-range prudence, short-termism over sustainability.Christine Lagarde
In that context, good regulation and supervision must be complemented by reform within financial institutions. While banks have much healthier capital and liquidity positions and face tighter regulation, and subprime mortgage dealing is largely gone, she said too many banks in Europe still remain weak.
“We have come a long way, but not far enough,” said Ms Lagarde, who was France's finance minister from 2007 to 2011, before leaving to be the IMF chief. “The system is safer, but not safe enough. Growth has rebounded, but is not shared enough.”
She said in terms of regulation, bank capital buffers should be higher. “'Too-big-to-fail’ remains a problem as banks grow in size and complexity,” she said. “There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector.”
New, post-crisis fault lines
High frequency trading and fintech were also adding to financial stability challenges. “In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations,” she said.
The political economy landscape had also shifted, with, ironically, a fading commitment to international cooperation. “We are now facing new, post-crisis, fault lines—from the potential rollback of financial regulation, to the fallout from excessive inequality, to protectionism and inward-looking policies, to rising global imbalances,” Ms Lagarde said.
Twenty four countries had fallen victim to banking crises in the GFC, and economic activity has still not returned to trend in most of them. Public debt in advanced economies rose by more than 30 percentage points of GDP, partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to governments bailing out the failing banks, she said.