Why bankers are driving us into the arms of another financial crisis

The finance industry has not learned lessons and crisis may engulf Europe in the five to ten years due to the unregulated growth of the shadow banking sector. Those are the findings of a major new survey of European academic experts

Bankers are circumventing regulatory controls

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Big business is used to its share of bad press, but the scorn reserved for the financial services sector can still be surprising. One recent UK national newspaper headline summed up the general attitude towards the banks: "Times are hard for bankers – but they did nearly bankrupt the planet".

Nine years on from the global financial crisis and the reputation of parts of the finance industry are yet to recover.

But what about the future? Might the industry learn from the mistakes and short-termism of the past and act in a way which is more economically, socially and environmentally sustainable?

Unfortunately, a new wide-ranging survey of economists and other social scientists from across Europe, USA and South Africa suggests not.

The survey on the future of Europe’s financial sector was undertaken as part of a €10m European Union-funded research project called Financialisation, Economy, Society and Sustainable Development (FESSUD), which is led by the University of Leeds.

50 economists from 14 institutions across Europe gave predictions on how the industry would change in the next five to ten years, and its impact on the economy, society and the environment.

Crisis may engulf the region in the five to ten years due to the unregulated growth of the so-called “shadow banking” sector

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Will Europe see economic growth in the next decade or is another crisis looming? Will wages rise? Will inequality fall? Should the policies of the European Central Bank (ECB) change to include responsibility for real economic growth rather than just price stability in the Eurozone?

Economists have been warning for some time that the UK and Continental Europe is heading for another financial crisis and the survey adds another voice to that chorus.

It forecasts that: crisis may engulf the region in the five to ten years due to the unregulated growth of the so-called “shadow banking” sector.

This is because non-bank financial businesses are taking advantage of poor regulation, and banks are seeking to avoid the impact of tighter regulations by conducting more activities off-balance sheet.

The sheer size and scale of FESSUD offers a wealth of detailed information about specific issues and individual economies which, when linked together, show what is really happening on the ground across the UK and Continental Europe.

Banks are seeking to avoid the impact of tighter regulations by conducting more activities off-balance sheet

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So it should be of deep concern that the survey predicts that the number of small locally-oriented savings banks and co-operatives will continue to fall or will be encouraged to adopt the business models of private banks.

While Europe’s financial system is expected to stay the same or grow in size in the next five to ten years, this will not translate into wider economic growth. Growth in the euro area will remain below 2 per cent and rising unemployment, welfare cuts and austerity will contribute to greater inequality in our societies.

There will be a slight or significant increase in inequality in income and wealth distribution in developed countries in the next five to ten years, while wage income as a share of Gross Domestic Product (GDP) will fall or remain unchanged.

The survey paints a gloomy picture. A revival of household lending, mainly through mortgages, will pose a moderate or significant risk to the financial system.

A rare bright spot in this survey is that household savings rates will remain the same or be slightly higher than savings rates which were registered before the financial crisis of 2008. All in all, the news is small comfort.

The role of the European Central Bank (ECB) is expected to expand to encompass generating real economic growth, in addition to its chief objective of maintaining price stability in the Eurozone, the survey showed.

This broadening would be mirrored in the role of national central banks, which will also focus more on financial stability as well as inflation price stability and economic activity.

The overarching message is clear. The finance industry has not learned lessons from the global financial crisis, and deep reform is needed to make it more economically, socially and environmentally sustainable.

No doubt times remain hard and sympathy remains in short supply for bankers, but based on this survey, it’s hardly surprising.

Professor Jesus Ferreiro is from the Department of Applied Economics at the University of the Basque Country. Professor Giuseppe Fontana is from Leeds University Business School