What were the causes of the global financial crisis in 2007-2008?
It is hard to believe it has been ten years since the start of the global financial crisis. However you define the “start,” it has been widely acknowledged that BNP Paribas’ freezing of three of its U.S. funds was the start of a crisis which affected all the world’s markets to some degree and wrought enormous change in the global financial system.
A year later, Lehman Brothers collapsed, followed by a chain of failures and near-collapses in institutions across the world.
What became apparent to everyone was that people around the world could be affected dramatically by events far away from their door. Maybe the problem was in the financial system, but the effects were felt across society at every level.
I recall those events – the crisis and collapse of Bear Stearns, the run on Northern Rock, looking out of my window at Canary Wharf and seeing the employees at Lehman being told about the collapse (pictured above). Few of us could escape feelings of fear, concern and anger about the events unfolding – I remember thinking: “When will this stop? How does this stop?”
Shifting economic power and regulatory burdens
Of course it did stop, thanks to concerted action by central banks and unprecedented taxpayer intervention in many countries. But the landscape looked very different afterwards, captured neatly by Reuters “A Decade in Charts” feature marking the 10th anniversary of the crisis. The global economy has come a long way.
The financial industry has had a massive overhaul in the last decade. Chinese banks are now the largest in the world (both by book value and market cap), where previously the biggest would have been the U.S. and European giants; financial institutions have had to cut costs dramatically to remain profitable; and there has been a massive acceleration in the numbers of regulatory reforms and requirements.
Not only does the banking system look so different: it also behaves differently. I remember thinking ten years ago that government would intervene in the banking system like never before. I recall one CEO referring to the regulator as his fourth business unit.
The role and function of the compliance and risk team has been revolutionized over the past decade beyond recognition. There’s a greater focus on personal liability, with regulator focus moving from rules-based compliance to culture and conduct. We’ve seen an enormous increase in the level of regulation, from increased capital requirements and living wills for banks to MiFID and EMIR. All of this has put pressure on our clients to remain compliant in an ever-changing world.
I recall at the time Complinet (now Thomson Reuters Regulatory Intelligence) was capturing 10 regulatory changes per day. We are now capturing 200, a 20-times increase after the explosion in regulatory change.
The extent of its changes, and its implications for regulated businesses, are captured in our annual Culture and Conduct Risk reports. This year’s, compiled by Stacey English, Susannah Hammond and Ashley Kovas from more than 750 financial firms around the world, revealed that some 37 percent of the biggest financial institutions have discarded business opportunities due to culture or conduct risk concerns. In those institutions (“Globally Systemically Important Financial Institutions”, or G-SIFIs in regulatory jargon), 87 percent of respondents believe the personal liability of senior managers will increase due to the increased regulatory focus on culture and conduct risk.
Enter modern risk management frameworks and RegTech
Technology is helping enormously. We are now seeing regtech becoming more and more important, particularly in data and risk management for capital planning, liquidity reporting and the like. We are again at a tipping point in the industry as technology becomes more important to our customers than ever before.
As a company, Thomson Reuters has come a long way over the last 10 years, from acquiring Complinet and World-Check to launching Org ID, the world’s first and now leading KYC on-boarding service, and Thomson Reuters Regulatory Intelligence, with the widest, most comprehensive rule book coverage from over 700 regulatory bodies. Our most recent market offering, Regulatory Change Management on our Connected Risk platform, is winning plaudits from its early adopters.
But risk is not a standalone function in any business. It is now integral to every proposition, every boardroom discussion. Companies such as ours are responsible for developing and implementing the strongest and most comprehensive responses to the challenges of MIFID II and the Fundamental Review of the Trading Book (FRTB).
If there is a lesson for us from this crisis, I believe it is about embracing and leading change – leading not following. And as I look out of my window today, I see an industry that is changing again. Innovation, once a distrusted word, is back and new technologies and adoption are running at a pace I have not seen for 20 years.
We have a history of helping our customers through crises, providing them with what they need to navigate global change – the industrial revolution, the great depression, two world wars, and countless economic shocks over the centuries.
There may still be risks in the financial system, but I am more optimistic than ever that the technology at our disposal in the future will help to ensure that change works for the global economy and the billions of people it serves.
For more coverage on the 10 year mark of the financial crisis, view our piece exploring the impact the last decade has had on Investment Banking, Oil and Funds.
Behind the Lehman Brothers photo
Kevin Coombs, photographer: This is a very simple story. This photo was shot from the fourth floor newsroom at our offices in Canary Wharf, the heart of London’s financial district. I was working on the pictures desk when I noticed three or four journalists looking out of the window. This is a busy newsroom and people don’t hang around staring out the window so I immediately grabbed my camera and ran across to see what was happening and spotted the Lehman employees.
I knew Lehman was struggling and I knew that was the Lehman Brothers building. As I was shooting the picture I was really thinking about how best to stop the reflections as I was shooting through thick glass. The people lining up is what struck me first but I did not realise the significance of it until I walked back over to the desk and checked our systems which showed the Lehman share price dipping. It became obvious that this was a crisis meeting and at that point I knew this was an important picture.
The picture has been used over and over to illustrate the beginning of the global financial crash. For me to shoot one of my most used pictures from our newsroom window is quite bizarre, but it proves you only see good pictures when you look around and have your camera ready at all times.