The stage is being set for another financial crisis

2008: A Crisis We Should Have Learned From

In 2008, the world experienced the worst financial crisis since the Great Depression. Financial institutions knew they were too big to fail and took reckless risks, in the confidence that taxpayers would cover their losses when things went wrong – a phenomenon known as moral hazard. With little incentive to act responsibly, ever greater risks were taken in the pursuit of private profit. 

When the crash came, it devastated economies, triggered mass unemployment and left taxpayers to pay for huge bank bailouts. Trillions of euros in public funds supported emergency rescues, which strained national budgets, suppressed public services and deepened inequality. The aftershocks rippled through the economy for years, prolonging instability and fuelling the Eurozone Crisis. Society bore an enormous cost. 

The Lobby’s False Narrative

In response, governments and international institutions introduced global standards to reduce risky practices and prevent another crisis. But today, hard-won safeguards are being weakened. Memories of the crisis have faded, and the financial lobby has returned in full force. At the EU, financial industry representatives are leveraging current concerns over stagnant growth to portray existing regulations as a burden, arguing that deregulation of the financial industry will improve the competitiveness of the European economy. Policymakers are buying into this argument, undoing the very rules designed to protect the system.

This is evident with the global banking rules known as “Basel III”, designed after the crisis to make banks safer. These rules introduce requirements for banks to better manage their risks and have more of their own resources, known as capital, to cover losses in case of a crisis. With more capital, banks are less likely to collapse, shielding taxpayers from expensive bailouts. Yet, in the EU, as in the US, implementation has been diluted and delayed. Banks have received exemptions and extensions.

For instance, in the Autumn of 2024, the European Parliament accepted a proposal to delay the implementation of the Fundamental Review of the Trading Book (FRTB). These rules were designed to ensure banks can handle losses from market risksThese are risks that come from changes in the value of financial instruments like shares, bonds or derivatives. When markets fall, banks can suffer big losses on these assets. Bank capital, made up of shareholders’ funds rather than borrowed money, acts as a loss-absorbing cushion. It helps banks stay solvent and continue lending even in a crisis instead of needing public bailouts., like when the prices of securities and derivatives that they trade go down. The FRTB was introduced in 2016 as part of global standards but has now been delayed until 2026 in the EU. 

These kinds of concessions don’t happen by accident. The financial lobby plays a major role. They argue that rules which make banks more resilient, limit lending, and therefore economic growth. But these claims do not hold up to scrutiny. Well-capitalised banks lend more, not less. Financial stability isn’t a barrier to growth, it’s the precondition for a prosperous economy. 

The Race to the Bottom

For some EU member states, delaying the application of banking rules isn’t enough. A growing number are pushing for a permanent weakening of financial safeguards, fueling an international regulatory race to the bottom with the US and UK. Earlier this year, France called for deeper, lasting changes to the FRTB. This was followed by a joint effort from France, Germany, and Italy for a full reassessment of the EU’s banking rules. The European Commission has responded, promising a report to evaluate the “competitiveness” of the EU banking sector. The financial lobby has changed the mood music. Riskier banks are now framed as more competitive, and the search for a pretext to dismantle global safeguards is well underway.

When policymakers, like members of the European Parliament, bow to this kind of pressure and loosen rules, the risks don’t disappear, they are transferred to society. Banks that know they are too big to fail are free to take reckless risks, secure in the knowledge that taxpayers, consumers, and workers will ultimately pay the price. This dynamic effectively privatises profits while socialising risks – a lesson we should have learned from 2008. 

The collapse of Credit Suisse in March 2023 was a recent reminder of what happens when things go wrong. Years of risk-taking and mismanagement, enabled by weak supervision, culminated in the downfall of one of the world’s biggest banks. A slow-burning crisis eroded investor confidence, ultimately triggering an emergency takeover to contain contagion and shield other parts of the financial system. Once again, public money was used to stabilise a financial institution deemed too big to fail. 

This wasn’t an isolated case. Around the same time, U.S. authorities had to step in to prevent fallout from the collapse of Silicon Valley Bank (SVB). In both instances, regulatory gaps and supervisory failures allowed banks to accumulate risks unchecked. Ultimately, public guarantees and central bank support bailed out these failing institutions to prevent a systemic meltdown. 

The Choice

The lesson is clear. Instead of rolling back protections, policymakers should be strengthening regulations, ensuring internationally agreed standards are fully implemented and applying them with robust supervision. Only 16 years on from the Great Recession, delayed reforms, diluted rules, and a return to risky practices are setting the stage for the next crisis. But the next financial crisis isn’t inevitable. It’s a choice. By resisting an international race to the bottom of banking rules, advocating for global cooperation and addressing emerging risks, it’s possible to safeguard financial stability and protect future generations.

The banking industry is lobbying against key safeguards, while Finance Watch is advocating for regulation which would prevent another crisis. Join us in our effort to prevent another financial meltdown. You can contribute in different ways:

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The rules of finance are not set in stone, they are decided by people. It is up to civil society to convince decision-makers to change them.

Max Kretschmer, Finance Watch