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Davos minds ponder financial crises past and future

3 min read

Modern Money

Nearly a decade after the onset of the financial crisis and following billions of dollars of costly regulatory reforms, some fundamental questions are being asked about how prepared the financial system is to combat future financial crises. Quite simply: Is the global financial system prepared to fend off another crisis?

The World Economic Forum in Davos is one of the places where today’s leaders in finance gather to ponder such questions. When it comes to financial stability, the Davos minds paint an uncertain picture – particularly in Europe.

Jeroen Dijsselbloem, president of the Euro Group and finance minister of the Netherlands, believes Europe currently sits in a very vulnerable position. “Our shock absorption capacity in Europe is still far to small. We are still over-leveraged in households. Many SMEs are overleveraged. Governments still don’t have a lot of fiscal space. … If the next crisis were to come, who is going to buffer the economic shock? The banks can’t at the moment.”

Dijsselbloem contrasted that situation with what he sees in the U.S. “If you look at the U.S., economic shocks are in very large part buffered by private investors and capital markets. We don’t have that in Europe.”

Stephen Schwarzman, the chairman, CEO and co-founder of Blackstone, echoed Dijsselbloem’s assessment of the sketchy landscape in Europe and, in a comment that would have drawn gasps in Davos a few short years ago, said regulatory reforms implemented in the U.S. deserve some of the credit for the relative strength of U.S. banks. “The European banking market … is much, much different now than the U.S. market. The U.S. banks are very strong. This was, in effect, a regulatory triumph, if you will – on the good side. They are much more willing to provide capital because they need earning assets and they have a good capital position. In Europe, we are going into businesses where we are lending money to people who really need it. They have fine credit, but they just can’t get the money.”

Dijsselbloem said European policymakers have no one to blame but themselves for the dicey state of the continent’s banks. “If you realize how dependent we are on the banking system, you also realize how foolish we were to deal with the banks late. The U.S. dealt with the banks very quickly; made them re-capitalize, made them take their losses, etc. It took us three or four years.”

So the Davos minds can’t say that every region of the world is equally prepared to combat another financial crisis. But if crisis strikes, policymakers have a recent case study in how to respond – and when.