## A Decade After Lehman, the Financial System Is Safer. Now We Must Avoid Reform Fatigue

_IMF Blog, October 3, 2018_

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## Bibliographic details
- Authors: Adolfo Barajas, Claudio Raddatz, James P Walsh
- Published: October 3, 2018

---

### Overview
- Publication date: October 3, 2018.
- Context: "In the decade since the collapse of US investment bank Lehman Brothers" triggered the most severe economic crisis since the Great Depression.
- Primary message: Regulation and supervision of the financial sector have been strengthened considerably, reducing the risk of another crisis, but "reform fatigue" risks undermining completion of the agenda and addressing new threats.
- Reference: Findings and recommendations draw on Chapter 2 of the latest Global Financial Stability Report.

### Evidence the financial system is safer
- Banks have "thicker and better capital cushions to absorb losses."
- Banks are "better able to convert assets into cash in times of stress."
- Countries use stress tests to check the health of the biggest banks.
- Oversight authorities have been set up "to monitor risks to the financial system."

### Remaining gaps in the post-crisis reform agenda
- Leverage ratio:
  - The so-called leverage ratio "should be completed" to constrain banks’ ability to expand excessively during boom times.
- Liquidity:
  - Pre-crisis behavior: many financial firms borrowed short term in wholesale markets to fund longer-term assets, leading to fire-sale asset sales when rollovers failed.
  - Basel Committee reforms introduced the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
  - Status: "Most countries have adopted the LCR, but the NSFR is still a work in progress. This work must be completed."
- Macroprudential regulation:
  - Some countries, including India and the United States, have set up authorities to monitor and contain systemic risks.
  - In many places, these authorities "lack sufficient powers and tools to rein in excessive buildup of leverage and mismatches in non-financial corporations and households."
  - Cross border cooperation in data sharing and systemic risks "should be improved."
- Shadow banking:
  - Progress has been made in overseeing and, to a lesser extent, prudentially regulating shadow banks such as asset-management companies.
  - "In many countries, including China and other emerging markets, the rapid growth of shadow banking could pose risks to other areas of the financial system."
- Bank resolution:
  - Post-crisis measures make it easier to wind down large banks with greater costs on shareholders and limits on public money.
  - "There has been less progress on resolution regimes for insurance companies."
  - "Cooperating across borders to address the failure of the world’s largest banks is a particular challenge."

### Emerging risks and new challenges
- Cyber risk: "The threat of destabilizing cyber-attacks on financial firms and exchanges."
- Financial technology:
  - New technologies offer benefits such as faster and cheaper electronic payments.
  - They also "pose challenges" and "pose risks that could amplify shocks to the financial system."
  - International cooperation is vital because "innovative technologies spread quickly across borders."
- Risk migration: "Risk tends to rise during good times, and it migrates to new, unexpected corners of the financial system."

### Policy recommendations and priorities
- Complete unfinished regulatory work:
  - Finish implementation of the leverage ratio.
  - Complete work on the Net Stable Funding Ratio (NSFR).
- Strengthen supervisory capacity:
  - Supervisors "must not weaken oversight of major banks whose failure could pose a threat to the financial system."
  - Empower macroprudential authorities with sufficient powers and tools.
- Improve cross-border cooperation:
  - Enhance cross border cooperation in data sharing and systemic risk monitoring.
  - Coordinate resolution planning and regimes for global systemically important financial institutions.
- Regulate and monitor nonbank sectors:
  - Continue to oversee and extend prudential regulation where warranted to shadow banking and asset-management activities, especially in jurisdictions with rapid growth.
- Balance innovation and safety:
  - Strive to "encourage beneficial innovation while safeguarding against risks" from new financial technologies.
  - Leverage international cooperation to manage cross-border diffusion of innovations and risks.
- Evaluate impacts:
  - With "ten years of experience in implementing the new reforms," conduct an evaluation of the impact of reforms on the broader economy to assess tradeoffs between costs and benefits.

### Concluding assessment
- Warning against complacency: "Regulators must avoid complacency."
- Realistic expectation: "It’s not possible to reduce the chance of a crisis to zero, nor should we seek to."
- Strategic imperative: Regulators "mustn’t get caught fighting the last war" and should remain vigilant to shifting sources of risk.

*Source: A Decade After Lehman, the Financial System Is Safer. Now We Must Avoid Reform Fatigue — IMF blog, October 3, 2018.*

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## References

- [Português](https://prd-sitecorecm.imf.org/pt/News/Articles/2018/10/03/blog-a-decade-after-lehman)
- [Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2018/09/25/Global-Financial-Stability-Report-October-2018)
- [https://www.imf.org/wp-content/uploads/2018/10/eng-september-27-gfsr3-1-revisedpng.png](https://www.imf.org/wp-content/uploads/2018/10/eng-september-27-gfsr3-1-revisedpng.png)
- [https://www.imf.org/wp-content/uploads/2018/10/eng-september-27-gfsr4.png](https://www.imf.org/wp-content/uploads/2018/10/eng-september-27-gfsr4.png)

_Source: https://www.imf.org/en/blogs/articles/2018/10/03/blog-a-decade-after-lehman_