Is Banking Safer Today than before the Crisis?

The world economy has been in slow motion for most of the period since the financial crisis of 2007. Interest rates fell steeply as central banks attempted to use monetary policy to get economies back on track. Falling interest rates result in lower interest margins for banks and a squeeze on profits. Banks have ended up paying hefty fines for assorted violations during and after the financial crisis.

This combination of adverse factors should have been bad news for banking in the advanced economies. It has been if you look at valuations of banks. Major banks in the United States (US) traded at below their book value until about a year or two ago. Leading banks in Europe are still trading below their book values. However, there is little talk of an imminent banking crisis. On the contrary, regulators exude confidence that banks have become safer, thanks to tighter regulation since the crisis. Is this true? The Economist (2017) devotes a special report to the subject and comes up with a tentative “yes.” Many will be sceptical about this conclusion.