The banking crisis of 2008 nearly brought down our global financial system. Five years later, it's not easy for us citizens to determine if the banking system we depend upon is safer or not.
We know that at the beginning of the month, the Federal Reserve announced higher capital requirements for American banks. This is a helpful step, because it reduces a bank's ability to make speculative investments and increases its ability to ride out financial trouble -- whether its own or systemwide. But it's also part of a delicate balancing act, since the requirements reduce a bank's flexibility in making loans to businesses that want to expand.
We know that the Dodd-Frank banking reform act passed by Congress has been implemented haltingly. Many of the regulations required by that act aren't yet in place, and there are frequent reports of lobbyists for financial institutions seeking to weaken them.
We know that in Europe there has been painfully slow progress in setting up an authority to oversee European banks.
We know that trading in the kind of complicated derivative instruments that helped trigger the 2008 crisis has increased again and that regulation of those transactions remains weak.
And what's really going on in China, whose banks are now among the world's largest? That's anyone's guess, but some experts are worried that no one really knows how stable or shaky those big Chinese banks are. And one big lesson of 2008 is that everything is connected now, sometimes in ways we don't understand.
But does all this affect you and me? You bet it does.
The banking system is to the economy what the circulatory system is to our bodies. The banking system moves money around in an orderly way and guarantees that those green pieces of paper in your wallet and computerized columns in your bank and investment statements represent real value. Bank regulators are like the system's doctors: They check how the banks are functioning (with the bank version of "stress tests"), try to keep them in good health, and intervene -- with the financial equivalent of medicine or surgery -- when a bank gets into trouble.
One of the things that caused the 2008 crisis and the near-collapse of many banks was that regulators either didn't understand the big risks the banks had taken on -- such as truckloads of dangerous, subprime mortgages -- or didn't want to intervene. It later became clear that some of the world's most respected financial institutions, including Lehman Brothers, had essentially misrepresented their financial conditions, and the regulators had missed it.
There had been clear malfeasance, ranging from tricky mortgages with escalating payments foisted on unsuspecting homeowners in the United States to depositors in Spain being advised by their banks to withdraw their savings from safe investments and place them in risky paper that later became nearly worthless.
Are we better off now than in 2008, when many average families and small investors got blindsided?
Who understands modern global banking well enough to answer that question? Certainly not our legislators, of whom perhaps a handful really understand modern banking. So we have to rely on the regulators.
My bet is that regulators are more alert and tougher today. But the elected officials who appoint them need to know that voters -- you and I -- want those regulators to be tough, nosy, cautious and, if necessary, aggressively tenacious. Those are our nest eggs -- some $18 trillion in U.S. retirement savings -- the financial institutions are playing with. The lesson we should have learned is that the biggest risk is too little bank regulation, not too much.
Peter Goldmark, a former budget director of New York State and former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund.