Almost a decade after the global financial crisis of 2008 — the world is still coming to terms with the aftermath — a lot has been written about its causes and what action should be taken to avoid a repeat.
To understand how devastating it was and why it was termed the worst financial crisis since the Great Depression that lasted from 1929 to 1939, T.T. Ram Mohan’s book Towards a Safer World of Banking: Ban Regulation After the Subprime crisis could come in handy.
Ram Mohan, professor of finance and economics at IIM, Ahmedabad, addresses several issues including the key causes, impact, and steps taken to prevent such failures and make banking safer. Finally, it asks the question: Is banking indeed safer than what it was in 2007?
The book takes up each of the issues in five chapters, and is conscious to explain financial jargon in simple terms to readers. It starts with asking the question why banks are fragile which gives the readers a sense of what the objectives of a banking system are and what is the fallout if a bank fails. It also touches upon the traditional safeguards in place to avoid bank failure and why these measures are inadequate.
It explores the causes of the subprime crisis in the United States, which later became a full blown financial crisis, breaking geographical boundaries. The author suggests that the crisis was primarily a failure of regulation and it would be incorrect to view the financial crisis as rising from bank loans alone. “The underlying cause was an excessive build-up of private debt,” he argues.
It also deals with the regulatory changes post the crisis like higher capital requirement for banks, stringent liquidity norms, steps taken to improve governance among others. It also devotes an entire chapter on a problem that came to the fore after the financial crisis — which refers to issues faced by large and highly interconnected financial institutions that hampered the orderly functioning of the financial system.
In conclusion, it explores if the banking system is indeed safer — post the crisis — and discusses some out-of-the-box proposals by experts to improve the functioning of banks.