Dr Andreas Kokkinis, expert in financial regulation from the School of Law, comments on the implications of the collapse of investment bank Lehman Brothers ten years ago.
''The collapse of investment bank Lehman Brothers in September 2008 marked the beginning of the most serious financial crisis since the 1930s which entailed a series of catastrophic bank failures in the US, UK, Iceland and elsewhere.
Ten years down the line, the string of legal and regulatory reforms to prevent another such crisis from happening is still ongoing with some reforms still being phased in. UK financial institutions now have to hold much higher amounts of equity capital than in 2008, which depends on their size, exposures and macroeconomic factors, domestic retail banking activities are ring-fenced and new rules apply on senior management and their remuneration. There is also a new legal framework to deal with ailing financial institutions (recovery and resolution framework).
These rules try to achieve two things:
(1) To reduce the likelihood that large systemically-important financial institutions may fail by making them more resilient to risks (by increasing their capital), and by discouraging excessive risk-taking (by restricting risk-taking incentives on the part of their senior managers); and
(2) To minimise the likelihood of a failure leading to the contamination of the financial system and necessitating a state-funded rescue (by ensuring that creditors will bear the financial consequences before the state steps in, and that the core utility-type functions of a failing institution will not be disrupted).
However, it is not certain that such reforms have gone far enough to prevent a new crisis from happening and economic and legal scholarship has identified several weaknesses of the emerging regulatory framework and its likelihood of being implemented in practice in situations of financial distress.''
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