Finance

Study: Major Banks Still At Risk For Failure

| by Ray Brown
The bull statue on Wall Street in New York CityThe bull statue on Wall Street in New York City

Harvard economist and former White House adviser Larry Summers said banks could be even more dangerous to the national economy now than they were before the disastrous financial crisis in 2008.

After the 2008 financial meltdown, new regulations were put into place to prevent a similar event from happening again. But in a paper by Summers and Natasha Sarin, a Harvard Ph.D candidate in economics, those regulations haven't done much, if anything at all, to keep our banks safe.

“To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased,” Summers and Sarin wrote, reported Fortune.

Regulations designed to make banks safer might actually contribute to a higher susceptibility to recession dangers, such as higher capital requirements with low interest rates.

“We believe that the main reason for our findings is that regulatory measures that have increased safety have been offset by a dramatic decline in the franchise value of major financial institutions, caused at least in part by these new regulations,” Summers and Sarin wrote.

In the study, Summers and Sarin said their research calls "into question the view of many officials and financial sector leaders who believe that large banks are far safer today than they were a decade ago.”

"It is certainly possible that markets were unduly complacent before the crisis and are excessively alarmed today," they wrote, according to CNBC. "But given that market risk measures functioned much more effectively as canaries in the coal mine during the 2008 crisis than did regulatory risk measures, we would caution against complacency."

And in an interview with CNBC, Summers said that financial institutions are not ready to deal with another recession.

"I don't think one can simply be complacent and assume that we've now created some kind of system where, because we measure less leverage in a regulatory context, we can assume that the institutions are far safer," he said. 

Sources: Fortune, CNBC (2) / Photo credit: Glen Scarborough/Flickr

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