Today marks the 10th anniversary of the 2008 global financial crisis that saw an overheated US housing market lead to a subprime mortgage meltdown, spurring a global credit crunch and high unemployment.
Although it may be unpleasant to many, Sept 15, 2008 is a day to remember, as it marked the moment when Lehman Brothers filed for bankruptcy.
Lehman was the fourth-largest US investment bank at the time of its collapse, with about 25,000 employees worldwide.
While enjoying a stream of revenue and net income in 2007, Lehman faced the beginning of the end in the second half of 2007 as its huge portfolio of mortgage securities made the bank vulnerable to deteriorating housing market conditions.
One of the main perpetrators of the crisis was the US Federal Reserve's attempt to ward off financial recession through low interest rates. Prolonged low rates fuelled a flood of liquidity and cheap money in the economic system, while bankers' imprudent financial practices induced the rise of subprime borrowers and subprime mortgages.
INTERLINKED SYSTEM
One of the most significant lessons from the financial crisis is how profoundly interconnected the financial system has become.
The crisis clearly demonstrated how quickly a systemic shock can reverberate through the financial sector and how devastating and far-reaching its impact can be -- affecting not only the stability of the global financial system, but also spilling over into the real economy across the world, said Michael Leibrock, managing director of credit and systemic risk at the Depository Trust & Clearing Corporation.
The financial crisis also illustrated that, in order to effectively manage risk in an interconnected world, it is crucial to have a transparent and comprehensive overview of exposures across financial entities, Mr Leibrock said.
Heightened post-crisis regulatory standards have certainly contributed to enhancing resilience within the financial services industry, which is a crucial part of protecting against the impact of systemic shocks, he said.
The US, under former president Barack Obama, passed several bills, such as the Dodd-Frank reforms, to address consumer protection, executive pay, bank financial cushions or capital requirements, and expanded regulation of the shadow banking system and derivatives.
In Europe, regulators introduced the Basel III regulations for banks, which increased capital reserve ratios and limits on leverage.
"That said, history has shown that even the most well-intended rules often end up having unintended consequences, even as it takes several years for those effects to transpire," Mr Leibrock said.
The most important challenge for regulators is to harmonise their guidance worldwide, he said, adding that more work needs to be done in this regard.
"In a highly interconnected world where financial actors can shift their activities quickly and easily across national boundaries, international regulatory cooperation is more important than ever to promote global financial stability and ensure a level playing field," Mr Leibrock said.
POTENTIAL WEAKNESS
While the financial system has undoubtedly become more resilient over the past decade, potential triggers for another crisis are never far away.
"Macroeconomic threats include rising tensions and uncertainty around trade agreements, increasing geopolitical risks, global debt levels that are reaching record levels and stretched asset valuations," Mr Leibrock said. "With respect to market risks, we also worry about how certain exchanged-traded funds that are invested in less liquid assets may behave in stressed market conditions, and we are growing concerned about the proliferation of esoteric and opaque ETFs with highly complex risk profiles."
Awareness is needed of considerable challenges facing central banks around the world as they start reversing their quantitative easing programmes and decreasing their multi-trillion balance sheets, he said.
"There are certainly many potential risks associated with a reversal on this massive scale, which is truly unprecedented," Mr Leibrock said. "Last but not least, we also worry about the ever-increasing sophistication and complexity of cyber-attacks."
In retrospect, the main lesson learned is that it's dangerous if organisations are allowed to be managed in ways where their focus is placed irresponsibly on short-term benefits, said John Siu, a partner in litigation and dispute management at Eversheds Sutherland.
"I can see that a collapse of the cryptocurrency market may trigger another crisis," Mr Siu said.
Bitcoin's meteoric rise last year had many observers calling it one of the biggest speculative manias in history. The cryptocurrency's tumble in 2018 may have helped cement its place in the bubble books.
The bitcoin price rose to nearly US$20,000 late last year as a result of increasing demand and how financial authorities in certain developed countries had accepted the cryptocurrency as a medium of legal payment. The price has sunk to about $6,000 at present.
HINDRANCES TO GROWTH
As for Thailand, a country whose financial system collapsed during the 1997 financial crisis, spillovers from the 2008 crisis took a toll on Thai exports, adding to domestic political turmoil that affected tourism and other service industries.
Luckily, Thailand was partially shielded from the 2008 crisis because of high foreign reserves, a sound domestic banking system and trade linkages with China.
"There won't be anything like the 1997 crisis," said John Woods, chief investment officer for Asia-Pacific at Credit Suisse. "Thailand has taken some preventive measures, not least to float its currency. The property and construction sector is much more balanced, and the banks are much healthier."
Abundant foreign reserves and the current account surplus will suffice as buffers against external shocks, particularly in the environment of synchronised economic growth, Mr Woods said.
"The only risk I see at the margin is high household debt," he said.
According to Bank of Thailand data on household borrowing, the ratio of household debt to GDP dropped to 77.6% in the first quarter from 78% in last year's final quarter.
But outstanding household debt in the first quarter rose to 12.17 trillion baht from 12 trillion logged at year-end 2017.
The surge of outstanding household debt was consistent with high growth seen in retail lending of commercial banks and private consumption, especially spending for durable goods such as homes and automobiles, said Kasikorn Research Center.
Thailand's problems also lie in its economic structure, where social inequality, an ageing population and inefficient public policy are seen to be robbing Thailand of inclusive development and hindering the country's economic growth potential, said former Bank of Thailand governor Prasarn Trairatvorakul.
Despite economic growth and greater accumulated wealth, a Gini coefficient ranging from 0.45 to 0.53 shows that income inequality has remained stubbornly high since the 1980s.
