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The financial system is still dealing with the impact from 2008

Heads of systemically important financial institutions last week saw the heads of several major U.S. banks, including JPMorgan Chase, Bank of America and Citigroup, come under intense questioning before Congress. I couldn’t help but recall the familiar image of a bowed head. After the 2008 crisis.

This time, politicians are not asking what Wall Street did wrong, but that another crisis, either geopolitical (bank presidents will leave China if Taiwan is invaded) or financial. I wanted to know they were planning the right thing if it happened. .

All of this highlights that many risks still exist in the market system 15 years after the Great Financial Crisis. For example, consider current concerns about liquidity in the US Treasury market. As the flash crash of October 2014, repo market pressure in September 2019, and his Covid-related turmoil in March 2020 showed, the ultimate ‘safe’ market is the has become very vulnerable.

This is itself part of the 2008 Legacy. financial market Growth outstripped the ability or desire of buyers to hold Treasury bills. De-globalization and US-China decoupling are the usual suspects of Asian nations buying sovereign bonds as the Fed aggressively seeks to offload the T-bill as part of quantitative tightening It means that you are trying to sell, not to.

on the other hand, major bank Firms that have traditionally played a major broker-dealer role in the Treasury market have said capital requirements since 2008 have restricted them from engaging in brokerage activities as they have in the past. (Banks hoped the pandemic-era exceptions from certain capital buffers would be made permanent).

A recent Brookings Institution report on this topic states: On the safe-haven status of US Treasuries. ”

Consumer advocacy groups like the Americans for Financial Reform are advocating for greater transparency in pre-trade data and government bonds to help reduce fragmentation in the $24 trillion U.S. Treasury market, the world’s largest and deepest market. We are promoting central clearing. and better regulation. Unsurprisingly, banks, they argue, are opposed not only to tighter regulation, but also to capital requirements, which are making it more difficult to hold more government bonds.

This brings us back to one of the core and unanswered questions of the Great Financial Crisis. Why are banks so special?Sure, the big US banks are much safer and better capitalized than they were before 2008. But why would they be frustrated by his single-digit capital requirements when companies in other industries hold multiples of his single-digit capital requirements?

Part of it is the simple desire to take more risks and make more money. But there are more subtle and justifiable grievances in it. That means banks will increasingly have to compete with less regulated market players such as principal trading firms (aka high-frequency funds) and fintech companies that have entered the T-bill market. A private equity giant that plays a key role in areas such as lending and housing.

This points to yet another problem with your system. Financial “innovation” still goes well beyond regulation, just as it did before 2008. It’s well known that private equity has made huge gains by being able to buy single-family homes, multifamily homes and even mobile his home his parks in such a big way. Banks would not have been able to in the wake of the crisis.

Since then, private equity has shifted to healthcare (They want to rationalize nursing homes, it’s creepy), and even target some of the jewels of U.S. industry: family-owned manufacturing. It shudders to think what these profitable community-based businesses will look like after massive funds have stripped away assets and piled up debt.

SEC is Proposed stronger rules for private funds and improved fee transparency and metrics, of course it is necessary. Meanwhile, the Treasury Department is considering public comment on how to prevent flash crashes on T-bill. There are even moves to tighten regulation of local banks, which play a larger role in the financial system. All this has its merits.

But it also presents the biggest question we haven’t been able to answer since 2008 — who does the financial system serve? Wall Street or Main Street? I would argue the latter, but there is no silver bullet to fix a system far from productive intermediation of savings into investments. From the increasingly volatile sovereign bond market, to the mortgage market now dominated by shadow banks, to the financialization of commodities, everything suggests to us that we should serve ourselves rather than the real economy. There are still too many market systems that exist in

Perhaps another crisis will be needed before that issue is finally resolved.

rana.foroohar@ft.com

https://www.ft.com/content/cbf8214d-0fb7-46bb-94dd-b70b1210c040 The financial system is still dealing with the impact from 2008

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