Significant stock market weakness has raised some concerns about our financial system in recent weeks. Time marches on, but the financial crisis of 2008-2009 remains a tender, sore memory. The common stocks of some of the largest banking organizations like Bank of America, Citigroup, and Deutsche Bank have shown particularly sharp declines recently.
Over the weekend, Peter Wallison of the American Enterprise Institute wrote an article in Forbes headlined “This isn’t the beginning of another financial crisis.” Wallison took note of the “stunning” recent fall in share prices, but argued we aren’t likely to see another crisis.
The 2008-2009 meltdown was a unique set of events, in Wallison’s argument, and even though it gained steam with general stock market weakness, the conditions leading to the historically significant 2008-2009 crisis were unique to that period. Wallison did say that recent developments could be consistent with a developing recession, however.
Today, we do have one set of conditions worth noting, when thinking about the 2008-2009 crisis. Bank capital regulation can be considered as an exercise in government accounting, given that this exercise is a matter of government regulation, and as capital regulation theoretically defends taxpayer capital standing behind the banking system.
Our largest banks appear to have higher capital relative to assets (and lower leverage) than they did before the 2007-2008 financial crisis, but only marginally so. Some folks argue that banks and their regulators could and should have been taking steps during the recovery to reduce their financial leverage significantly more than they have so far.
In turn, in a possible future recession, we may have some more excitement in our banking system, for all the lessons – including accounting lessons – we could have learned in recent decades.