How To Prevent a New Global Financial Crisis

Abstract

The main issue addressed in this paper is whether a new financial crisis can be avoided.
After reviewing the key elements that were present in the 2007/2009 financial crisis, there is an analysis of the regulatory reforms which took place during and after the financial meltdown. The role played in it by the shadow banking system and the regulatory reforms dealing with it deserve particular attention.

The regulatory reforms are assessed in the context of systemic risk and run vulnerability in order to recommend what should be done to prevent a new financial crisis from happening.

The main conclusions are:

1) A key issue to avoid a new financial crisis is to prevent an excessive concentration of loans in any one sector, region or kind of assets of the economy.

2) The role of the central bank as lender of last resort should be reassessed in light of the experience of what has been done in the context of the COVID-19 pandemic.

3) In order to prevent managers from taking excessive risks using other people´s money, managerial compensation schemes should be changed.

4) Issues which have to do with the conflict of interests in the credit rating agencies are still waiting for better regulation.

5) After the failure of mainstream economic theory, it is time to reevaluate the contributions of authors like Keynes, Kindleberger and Minsky on the subject of economic crisis.

Keywords: Financial crisis, shadow banking system, micro-prudential regulation, macro-prudential regulation, lender of last resort, dealer of last resort

JEL Classification: G01, G21, G23