Is Another Financial Crisis Looming?

Yes. But when exactly? This is the fundamental question given the destruction of wealth caused by the Great Crisis of 2008–09. The contribution of finance to growth – and therefore prosperity – is being challenged in advanced economies where total financial assets are many times greater than countries’ GDPs. The increased frequency and magnitude of crises over the past thirty years has led many to question the ability of regulators and oversight bodies – not to eliminate crises but contain them and avoid financial contagion (including to less advanced economies). Concerns remain about financial stability: financial assets continue to grow along with debt (both public and private); monetary policies that rely on quantitative easing and long-term low interest rates have likely led to suboptimal capital allocation and bubbles in certain financial markets. The balance sheets of some European and Asian banks still carry too many bad debts. Default rates are increasing in the United States and Asia. An entire system of financial activities being conducted without intermediaries – known as shadow banking – is still under-regulated compared to the traditional banking industry, and the different players involved (banks, insurers, asset managers and clearing houses) pose a systemic risk. Finally, three aspects of regulation raise questions about how effective it is: its complexity, its instability, and weakened transatlantic cooperation. What are the main factors of persistent risks: industry concentration, the interconnectedness of industry players, debt accumulation, the emergence of ultra-accommodative monetary policy with rising interest rates? Is it possible to continue linking finance and prosperity… for everyone?