The global banking crisis of 2023 shines a focus on the state of the world’s banking systems and banking regulation. Many lessons learned from the 2008 financial crisis were novel to the industrialised West.
Source: Drishti IAS
The North Atlantic Financial Crisis is what Rakesh Mohan, a former deputy governor of the Reserve Bank of India (RBI), called it.
Three lessons came from the 2008 financial crisis. The first was that a financial crisis could trigger a recession or possibly a more serious macroeconomic disaster. Lehman Brothers’ fall, which resulted in the financial markets being frozen, marked the beginning of the 2008 crisis. This in turn put other major financial corporations in danger. The US unemployment rates increased, which was followed by a slowdown in GDP growth, ultimately leading to a severe recession in the country.
The spread of financial dangers can happen considerably more quickly than is typically thought. The worldwide financial markets were swiftly affected by the 2008 crisis, which began in the US. As a result of their less developed financial systems’ lack of connections to the American system, emerging markets recovered more quickly. The crisis in Europe’s major countries, however, not only brought about a number of issues but also posed a threat to the creation of the Euro.
Source: CBS News
The third lesson was that financial stability should also be a priority for central banks, in addition to price stability. Before the 2008 financial crisis, it was widely believed that central banks should only concentrate on maintaining price stability. Prices were largely constant in the time before the crisis, yet there was still a financial crisis
Since 2008, it is generally agreed upon that price stability is a necessary but insufficient prerequisite for macroeconomic stability. Equally crucial is maintaining financial stability.
There is still much to be learned in regards to the third lesson. New problems have arisen as a result of the current situation. If easy credit in 2008 fueled the housing bubble, stringent monetary policies in 2023 have caused bond prices to fall, triggering the current crisis. If more loans for homes was seen in 2008, higher investments in securities will be seen in 2023.
The RBI strengthened its regulation and oversight as a result of these crises. As a result, the Indian banking industry started the pandemic and the post-pandemic phase in a healthier shape than it did before. That being said, the RBI must constantly monitor international developments as public confidence in the financial sector rapidly declines.
Why is the largest economy in the world continually exposed to have a weak banking system?Share your views in the comments down below.
