By: First Union
A Decade Later and Banks Could Still Be In Trouble
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The crisis of 2008 certainly shook the world. Since then, the US along with numerous other countries have been working to straighten out their economies and striving to ensure that such a collapse doesn't occur again. Have they done enough? Has the US done enough to stem another financial crisis? That remains to be seen; however, many experts believe that there are current factors existent that could ultimately plunge the country, if not the world, into another economic collapse.
Wall Street is always in that "get rich quick" frame of mind. And while speculative endeavors may not be as rampant as they were back then, the sheer competition abounding on Wall Street could force the economic picture toward one of gloom and doom similar to that which we had just before the 2008 debacle. Four key factors could exacerbate any impending financial crisis. Below are those elements you need to be aware of…
1. Big banks have more assets on hand than they did before the 2008 crisis
A prime factor in the 2008 collapse was that few banks were holding the lion's share of assets. Put into perspective, the top five banks owned just about 45% of financial assets. Today that number is actually at 46%. And to put it even more into perspective, the top ten banks hold 55% of assets. Whereas in the US, the other 5700 banks have the remaining share.
The fact that so few hold the bulk of financial assets isn't the troubling point; rather, it is the decisions that these few banks make that will dictate whether or not the economy collapses again. Are they making poor choices when it comes to loan approvals? Are they gambling against the value of homes? These things are what led the country to have a housing meltdown a decade ago. And it seems that suspect patterns are reemerging. The problem then becomes that the other banks do not have enough assets to step in, thus requiring the government to do so. Having learned something of a lesson, banks are laying off more speculative endeavors, but again, the greed rampant on Wall Street cannot be ignored here.
2. Banks still do have high leverage
Why is the banking industry so vulnerable to a crisis…For one, they tend to write large loans given small down payments. As long as they proceed with caution and are prudent about the loans they do write, this is fine. However, today it seems that the banks are only using a little less leverage than they did just before 2008.
When all is good, this works great—a bank's profitability increases and so they continue to use leverage. But when times aren't so good, and housing prices sharply decline, banks are then forced to write off those values. This keeps the leverage rising and the bank could be facing bankruptcy. More rigid rules as far as the amount of leverage a bank can assume have been put into place since 2008—yet, it remains to be seen if there will eventually be a "run on the banks."
3. There were too few prosecutions - moral questions
Those execs from the larger than life lending institutions were not prosecuted for any part of the financial crisis. And many do cite criminal activity among bank executives as one of the primary reasons for the collapse. This lack of prosecution engendered a moral hazard of sorts. What this means essentially is that those executives who got off scot-free, aren't fearful of repercussions moving forward. Their likelihood of repeating such behavior thus increases.
When the 2008 crisis did hit, prosecutors were more apt to go after companies than they were individuals. Banks were fined, and no one served any time. Concerning the collapse, the country's six largest lenders paid a total of about $110 billion. This affects shareholders far more than it does the executives responsible.
4. Many of the regulations are now being peeled back
As a result of the 2008 crisis, Congress passed the Dodd-Frank Act; this served to further regulate banks to stem another such meltdown. The law helped to prevent banks from engaging in overtly speculative activity. And it also created the Consumer Financial Protection Bureau, another important watchdog of the banking industry.
However, flash forward a decade later, and lobbyists along with politicians are looking to peel back this legislation. They insist that such regulations are now doing more harm than good. Yes, the legislation does get to be costly for smaller banks, but in terms of larger banks, they are eager to have these laws pushed back as they want to take more risks and look at more speculative options. If such risks go bad though, this would undoubtedly cause a banking crisis. Repealing the laws and peeling back the legislation now in place will spell disaster and will potentially hasten another collapse.
What you need to know right now
Regulation helps to prevent a financial collapse. Historically, this has been proven time and time again. Ensuring regulations are kept in place or even tightened will keep us from another disaster. Contacting your congressional representative and expressing your concern over what's going on, is the first step. Voting for those candidates who support regulation is also crucial. It does make a difference.