News Column

Is Barclays's Antony Jenkins right that there is a significant risk of another financial crash?

January 24, 2014

YES Philip Booth There is certainly a risk that we could see another financial crisis. The Eurozone affair rumbles on, and default or financial repression from the Mediterranean is likely. Domestically, the Bank of England appears to have sidelined the inflation target, and acts as if it wishes to keep monetary policy loose at all costs. This is potentially just deferring a bad debt crisis, as the economy will find it increasingly difficult to adjust to the higher interest rates which must eventually come. Our government has serious fiscal problems too, and the fiscal headwinds are enormous. So a crisis of some form is likely unless action is taken. But it will probably not be a full-scale banking crisis. We have a better system for winding up broken banks, and other financial institutions hold the lion's share of government debt. There may be trouble ahead, but not exactly the same trouble as in 2008. Philip Booth is professor of insurance and risk management at Cass Business School , and editorial and programme director at the Institute of Economic Affairs . NO Patricia Jackson It is hard to be totally confident that crises will not recur - one lesson from 2008 is that authorities must monitor risks in fast-growing opaque markets, and it is not clear that the mechanisms to do this are in place. But radical action since the crisis has substantially increased the quality and quantity of capital and liquidity in the banking system. Also, importantly, an increased focus on risk governance should help to keep risks within the bounds set by boards. And new techniques like stress-testing have improved transparency. These measures have got to the heart of many of the factors that led to the 2008 crisis. Issues remain around the transparency of risk in the wider financial system; given higher capital charges, banks have exited from areas like infrastructure lending and project finance, leading to a sharp increase in shadow banking. But overall progress has been made. Patricia Jackson is head of financial regulatory advice at EY.

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Source: City A.M. (UK)

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