How a wave of risky lending has set the world up for another financial crisis

Unsafe lending continues despite regulations, which merely pushed it into other sectors as big banks withdrew. This has left the global economy on the brink of a new disaster, in a cycle set to continue without greater oversight

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Tobias Adrian, director of the monetary and capital markets department at the International Monetary Fund, holds up a copy of the Global Financial Stability Report at a news conference during the annual meetings of the IMF and World Bank Group in Washington, on October 16. Photo: Bloomberg

Published: 12:30am, 28 Oct 2019Updated: 12:35am, 28 Oct 2019

The IMF's biannual Global Financial Stability Report, with its dense and detailed analysis of systemic developments, is not exactly bedtime reading. Yet there was enough in the latest issue to provoke nightmares for those who cared to read what it had to say about multiple risks facing the system.

There were repeated references to similarities between the current state of financial markets and that in the run-up to the 2008 global financial crisis. And, this time, the threats extend not only to banks and other lenders, but also to pension funds and insurance companies, as well as corporations.

For now, the world remains anaesthetised by waves of monetary easing, which shored up financial institutions against systemic failure 10 years ago. It has also, more recently, dulled the pain of trade wars. But it cannot conceal the harm being done to the vital organs of finance.

The world's big banks are not about to start crashing (as appeared likely at the end of 2008) because their capital buffers are strong enough (for now) to withstand another crisis. But, ironically, some measures designed to shore up big banks have pushed borrowers into the hands of unsafe lenders.

Multiple financial institutions, from insurance companies to pension funds, got into the banking game indirectly as big banks largely withdrew from lending with regulators breathing down their necks. Hence the global orgy of lending in recent years, despite banks' partial retreat.

An obvious recipe for trouble, you might think, but many smaller banks – Japanese banks especially – have compounded the folly by borrowing dollars to lend when they don't have access to adequate dollar deposits to fund such lending.