standard Smart financial regulation: Responding to early warning signals

This Policy Brief recommends that UK financial regulation needs to be more responsive and anticipatory, identifying early warning signals in advance of an impending financial crisis. Combining research in financial history and law it reviews some of the lessons learnt from the 2007-08 banking crisis, and how to monitor, prepare and respond to events that may be signs of systemic failure in the UK financial sector

Summary

The UK financial sector is a highly competitive system that has, historically, demonstrated resilience to crisis. All that changed with the banking crisis of 2007-08, affecting not just individual banks but a whole array of interconnected financial institutions, leading to a panic that spread throughout the entire country. While this crisis took many by surprise, it is now evident there were many early warning signals that – if responded to in time – could have mitigated or reduced the impacts of the global financial crisis. These include, for example: news of financial difficulties of Lehman Brothers in the US and Northern Rock in the UK; the sub-prime mortgage bubble in the US and official reports warning of a decline in the US mortgage market prior to 2007; notable failures of IKB and Sachsenbank in Germany; the collapse of New Century Capital; and HSBC writing off large amounts of mortgage and consumer lending debts.

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