Compliance

Compliance

10 years on from the global financial crisis – here’s how things have changed

LII reviews how the fallout from the financial crisis has driven a far more disciplined business model in the last decade

August 9 is seen as the 10-year anniversary of the global financial crisis.

This was the date that French bank BNP Paribas began shutting down investment funds because there were problems in the US securities market. This then lead to a cycle of events that would consume the major banks around the world.

The BBC’s business editor, Simon Jack, described this moment as the “first tremor of a full-blown financial earthquake”.

According to research by consultancy Oliver Wyman, much has changed in the global financial market over the past decade.

  1. US banks have grown their market share up 10 percent, from what it was 10 years ago
  2. However, revenues have fallen 25 percent from pre-crisis levels, from $300bn before the crash to $230bn now
  3. However, revenues have fallen 25 percent from pre-crisis levels, from $300bn before the crash to $230bn now

Source: Oliver Wyman

Christian Edelmann, global head of corporate and institutional banking and wealth and asset management at Oliver Wyman, said: “The capital markets industry has radically reshaped itself since the crisis began 10 years ago.  Banks have enhanced their risk management, met new regulatory requirements and cut costs to restore profitability. The next 10 years will see similarly radical changes.”

How likely is it that another crash will happen?

Though the global economy is in a better position than it was a decade ago, economists are warning that it could easily turn upside down again.

Alastair Darling, the UK’s chancellor in 2007, said that regulators must remain vigilant about the risks to the economy to prevent a crisis happening again.

He told BBC Radio 4’s Today programme: The lesson from 10 years ago is that something that can start apparently as a small ripple in the water can become mountainous seas very quickly.”

As well, he said the rising level of consumer debt in the economy should “raise alarm bells”.

Over in the US, however, there is more confidence in the market. Earlier this year, the Federal Reserve chair Janet Yellen said it was unlikely that there would be another financial crisis in our lifetime.

After carrying out stress tests on the US banks, Yellen said they were very much stronger.

“I think the system is much safer and much sounder. We are doing a lot more to try to look for financial stability risks that may not be immediately apparent but to look in corners of the financial system that are not subject to regulation, outside those areas in order to try to detect threats to financial stability that may be emerging,” she said.

He told BBC Radio 4’s Today programme: The lesson from 10 years ago is that something that can start apparently as a small ripple in the water can become mountainous seas very quickly.”

As well, he said the rising level of consumer debt in the economy should “raise alarm bells”.

Over in the US, however, there is more confidence in the market. Earlier this year, the Federal Reserve chair Janet Yellen said it was unlikely that there would be another financial crisis in our lifetime.

After carrying out stress tests on the US banks, Yellen said they were very much stronger.

“I think the system is much safer and much sounder. We are doing a lot more to try to look for financial stability risks that may not be immediately apparent but to look in corners of the financial system that are not subject to regulation, outside those areas in order to try to detect threats to financial stability that may be emerging,” she said.

Assessing the global financial crisis’s impact on the general and life insurance sector, GlobalData Financial Services says above all, the fallout from the financial crisis has driven a far more disciplined business model in the last decade within the general insurance industry – with players adapting to what has often been referred to as the “new normal”.

GlobalData Financial Services says: “This new normal was the arrival of an understanding that, with erratic and unreliable investment returns, insurers could no longer afford to sit far above 100% COR in their primary business; instead this needed to deliver profit.

“The unparalleled drive for profitability within the insurance book has set the scene for insurers’ work in the last ten years to create greater efficiencies  in operations, invest in technology, redefine and make more sophisticated the selection of business underwritten, and place health of book as the focus of strategy rather than unrelenting growth.”

Beyond this, GlobalData Financial Services notes that the financial crisis stands as a precursor to the Solvency II regime which has itself driven mergers, acquisitions, a number of market exits and the need for insurers to seek diversification of business.