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From the collapse of Lehman Brothers in 2008 to this year’s fire sale of Credit Suisse, the landscape of the banking sector has changed profoundly following a wave of consolidation and tighter regulation.
Tougher regulation
After Lehman Brothers crumbled, regulators in the United States and Europe tightened the regulatory framework on banks to ensure they are better prepared to handle crises.
They are now required to hold certain amounts of capital which is meant to absorb losses.
Banks are also required to keep large reserves of cash and assets that can be quickly sold in case of a sudden rush by depositors to withdraw their funds.
These rules aim to avoid the need for governments to use taxpayer funds to rescue lenders.
Ana Botin, the head of Spanish lender Santander and then head of the European Banking Federation, said the region has a “framework that can guide a failing bank through intervention, recovery and eventually resolution, regardless of its size.”
The takeover of Credit Suisse by rival UBS in March, arranged in haste by Swiss authorities, shows that a key lesson of the Lehman Brothers collapse was indeed learned: some banks are indeed “too big to fail” as that would cause shockwaves not only through the banking sector but the wider economy.
Since then, Swiss experts have recommended stepping up financial buffers for such large institutions as they were insufficient in the case of Credit Suisse and an ad-hoc solution might not always be so easy to find.
Consolidation
The collapse of Lehman Brothers also triggered a wave of consolidation in the banking sector.
During the months of September and October 2008, Bank of America bought Merrill Lynch for $50 billion, BNP Paribas took control of Fortis in Belgium and Luxembourg for $20.3 billion, Lloyds snapped up Halifax-Bank of Scotland (HBOS) for $12.2 billion, and Santander took over the banking network of Britain’s Bradford & Bingley after it was nationalised.
“The crisis, in short, cleaned house by killing off the most fragile players,” said Xavier Musca, who was the head of the French Treasury during the global financial crisis and now heads up Credit Agricole’s investment bank.
Europe saw less consolidation than the United States, where the “crisis was an opportunity for the US government to restructure the banking sector,” said Musca.
David Benamou, chief investment officer at Axiom Alternative Investments, said US banks now dominate the global business banking sector as they “profited from certain regulatory differences to take parts of the European market”.
Benamou pointed to limits on bonuses in Europe.
Still fragile?
The collapse of a number of US regional banks at the beginning of the year, which hastened the demise of Credit Suisse, revived concern about the stability of the sector.
For Musca, the crisis showed the need to maintain regulation on the banking sector and avoid a return to the past.
After Donald Trump became president he decided to exempt all but the largest banks from much of the regulation brought in to ensure they can better handle crises, which set the stage for the turbulence earlier this year.
US banking regulators have since proposed to tighten measures to strengthen medium-sized lenders.
The biggest banks “are subject to a much tougher regime today than they were back in 2007-2008,” said William Dudley, who was deputy head of Federal Reserve Bank of New York at the start of the global financial crisis.
“We’ve definitely got work to do but we’re in a better place.”
