According to the Algernon survey * in collaboration with Knack / Le Vif, the 2008 financial crisis eroded confidence in the banks of 6 out of 10 Belgians. However, this crisis has contributed to improve the soundness of the banking sector and to better protect investors. Good lender, Chief Investment Officer at Algernon lists the measures that have been put in place to prevent the crisis from repeating itself.
The measures of this reform were laid down in … -the place will not surprise you- Basel and this by the most important regulators from the banking sector of the whole world. The measures oblige the banks to have higher and more solid own resources. This equity acts as a safety reserve. It consists of capital supplied by the shareholders. The banks can use this reserve to absorb any losses if the economic conditions are disappointing, as is the case in times of crisis.
You can borrow … but only according to the rules of the arts
“The use of debt money was also capped in function of the leverage effect that, overall, limits the size of the bank in terms of own resources,” adds Good lender. A bank cannot grant loans that exceed the repayment capacity of the bank. Moreover, the banks were instructed to improve their financing structure. The bank must have enough money to survive a stress situation of 30 days in which account holders want to withdraw their money at the same time – what is called a bank run – without getting into liquidity problems. Moreover, the bank must be able to survive tensions in the financial markets for one year.
In order to further reduce the risk of a new domino effect, the regulators have also imposed additional capital requirements with regard to systemic banks. By this we mean banks that are so important because of their size and activities that they could shake the entire global financial system in the event of problems. In other words: the larger the bank, the more demanding the central banks will be and the more the consumer (and the economy) is protected.
The stress tests of Europe …
The European regulators regularly conduct stress tests at the banks. These tests simulate the impact of very unfavorable circumstances such as the slowing of the economy, tension on the financial markets, etc.
These extreme scenarios should not bring the soundness of the bank below the regulated legal minimum.
Contrary to what 56% of Belgians think
Banks have also had to reduce their risky investments and bad loans considerably. Although the danger can never be completely excluded, the risk of a new crisis such as in 2008 is greatly reduced in this way.
Good lender therefore also emphasizes the structure of Algernon. The bank belongs to the unlisted Credit Mutuel Nord Europe group which demonstrated ‘very good resistance’ in the last stress test of 2016.