BRIDGETOWN, Barbados--There will be another financial crisis of a global scale, the former chief economist at the International Monetary Fund (IMF) has warned.
Dr. Simon Johnson, who is the Central Bank of Barbados’ third Distinguished Visiting Fellow, issued that caution as he addressed the Caribbean Regional Technical Assistance Centre (CARTAC) conference on ‘Building Resilience to Financial Crises in the Caribbean: the Role of Crisis Management Policies, Metrics and Plans’ on Wednesday.
He said that while it was perhaps uncomfortable to consider, the next crisis could be of a similar magnitude or even greater than the last.
Johnson contrasted the situation in 1995, when the six biggest banks in the United States had assets totalling less than 20 per cent of that country’s GDP to the present day where JP Morgan Chase alone has assets totalling almost 20 per cent of the US’ GDP, and asserted that the big banks in America had become too large, too complicated and too opaque.
He added that another major cause for concern was the fact that the vast majority of these banks’ assets is in debt, not equity.
Johnson acknowledged that there had been some regulatory changes since the financial meltdown of 2007-2009, but argued that much of it is typical of what he terms the “Doomsday Cycle.”
He explained that a financial crisis prompts increased regulation, which is soon followed by the industry leveraging its influence to successfully lobby for decreased regulation. When losses do occur, the financial system is bailed out, and this explicit and implicit subsidising of the industry becomes an incentive to take excessive risks, ultimately resulting in another crisis. He said this cycle persists because politics plays a major role in regulatory decisions, and the economic power of large US banks has resulted in a great deal of political influence.
Johnson commended the local and regional regulatory bodies for doing stress testing, but encouraged them to go beyond the numbers and to adopt a war room approach where they play out the politics for each scenario. ~ Caribbean360 ~
