On 15th September 2008, Lehman Brothers declared itself bankrupt. In one of the most dramatic events of the 2007-2008 global financial crisis, the 160-year old institution collapsed due to its exposure to subprime mortgages. After Lehman's failure, financial markets entered a period of unprecedented volatility and governments spent trillions of dollars attempting to restore confidence in the banking industry. Five years on, how has the banking industry landscape changed?
On the one hand, the risk of another Lehman-style collapse has been reduced because banks are better capitalised than they were before the crisis. For UK banks, for example, Tier 1 capital was 8% of risk-weighted assets in 2008; by 2012 this had risen to 13%. In addition, the market infrastructure is being strengthened by the introduction of central counterparties, which reduce the bilateral risk in derivatives trades and help to ensure that such trades are adequately collateralised. Finally, governments are beginning to recover some of the money they pumped into market stabilisation. For example, the UK government is selling off part of its shareholding in Lloyds Banking Group at a paper profit of 1.4p per share above the bailout price that it paid in 2008.
On the other hand, higher capitalisation requirements and increasingly complex regulatory demands have made the banking industry less profitable than it was before the crisis. The average return on equity across the world's ten largest banks is now only 9%, compared to 17% in 2005. Markets seem to be addicted to the supply of cheap funds that has been created by quantitative easing. And new banking scandals such as LIBOR fixing continue to erode confidence in the integrity of banks and bankers.
One interesting change in the global banking landscape becomes apparent if you look at the world’s largest banks by capital value. In 2007 four of the world top ten banks were European banking groups. In 2012 only one of them is European and four of the top ten are Chinese banks. Recent forecasts predict that China will overtake the USA to become the world's largest economy by 2020. Perhaps the financial crisis that has captured so much attention will ultimately turn out to be only mood music against the backdrop of significant shifts of economic power.
Five Years After Lehman, The Economist, September 14, 2013
Lloyds Share Sale Raises £3.2bn, BBC News, September 17, 2013
Forecast: World’s Largest Economies in 2020, Euromonitor International, May 16, 2013