Youssef Cassis

 

On his book Crises and Opportunities: The Shaping of Modern Finance

Cover Interview of August 08, 2011

Lastly

Reflecting on more than a hundred year of financial crises, it appears that few opportunities for re-shaping the financial system have actually been seized.  This is because significant changes are only carried out in the wake of very serious crises, and such crises have been a fairly rare occurrence.

The most significant changes took place in the United States: the panic of 1907 was followed by the creation of the Federal Reserve in 1913. And the banking crises of the early 1930s led, amongst others, to the Glass-Steagall Act of 1933 separating commercial banking from investment banking.

Wars have played a greater impact on European finance, with World War II, in particular, leading to far higher a degree of state intervention in financial affairs.

It also appears that changes in the financial architecture have always been a compromise between economic necessity and political expediency.

The Federal Reserve System was duly put in place in 1913, yet political compromises impaired its efficiency and a wider-ranging reform allowing branch banking and interstate banking was not contemplated.

Equally, it is doubtful that the Glass-Steagall Act addressed the main causes of the banking crises that broke out between 1930 and 1933: most of the small banks that failed during these years were only commercial banks, while the large New York banks, which had securities affiliates, survived the crisis. On the other hand, the introduction of deposit insurance, in other words the government commitment to make banks safer for depositors, could justify a measure limiting risk taking.

This leads one to wonder if the financial crisis of 2007-2008 has been severe enough to be followed by a fundamental reform of the financial system—as well as the extent to which the implemented reforms will have been impaired by political motives, including banks’ lobbying.


© 2011 Youssef Cassis