The financial crisis and implications for policy making
Belgian Finance Minister Didier Reynders
Coming back to the financial crisis, how did we get there? How could such sophisticated machinery fall apart so rapidly?
The jury is still out as to the importance of each specific ingredient. But it is clear by now that a combination of factors, both at the macro and micro levels, together led to a huge underestimation of risks and, ultimately, to a total loss of confidence in the financial system. The whole world was looking at the future through a rear mirror of low defaults and high growth.
What are the implications for policy making?
In the longer run, banks will have to learn anew about risk management. Risk management is at the core of banking and should not be left exclusively to outsiders or inside “experts” running models based on the past. What bank managers and board members do not understand, they should not do. Also, incentives should be better aligned with long term objectives and less reliant on myopic and short term indicators.
We will also have to better educate and inform consumers about financial products. Too many people had become accustomed to the idea that 10% returns were normal and without risks (now, even some bankers apparently thought though…). This led to avoidable personal drama.
Finally, bank regulation and supervision should adapt to the reality of globalisation. This means finding a better balance between national and international regulation, in favour of the latter. It also means paying more attention to global developments, imbalances and macroeconomic risks. In short, we lost track of the big picture and need to find ways to better articulate macroeconomic policy with microeconomic supervision.
Didier Reynders is the Belgian Deputy Prime Minister and Minister of Finance (Mouvement Réformateur)