It’s just over a decade since the global financial crash caused chaos for a lot of the world’s economy. Within the last ten years there have been a few changes made to help clear up the fallout from the worst financial meltdown of the 21st century so far, and plenty of lessons learnt. However, according to the IMF, the world economy could be at risk of another financial crash. There are a few worrying factors which suggest this could be on the cards.
Rising Public Debt
One of the main concerns for the IMF and the reason behind it claiming there is a risk of another financial crash is due to rising public debt. Currently global debt levels are much higher than what they were at the time of the crash in 2008.
Recent figures show that in June 2018, UK public sector net debt was a huge £1,792.3 billion, while in the USA it surged past the $21 trillion mark for the first time ever back in March. It has been rising 36 per cent faster than the economy too and continues to increase at a rapid rate.
These goings on appear to have become more normalised in the past few months and years. Even when there has been positive economic news and performances, billions and trillions have been piling up in debt. There is a risk that such high figures could trigger global panic and result in another financial crisis.
Chinese Shadow Banks
China’s shadow banking ecosystem has grown to be worth around $15 trillion, connecting thousands of financial institutions with companies, local government and households. Traditional commercial banks have been driving shadow banking (essentially unregulated lending) in the world’s largest country, as they’ve been able to keep shadow banking assets off their balance sheets.
This is one of the reasons it has become the fastest-growing among major economies. Sources of funding for shadow banking loans include assets funded by asset management products, entrusted loans, leasing and more.
Yet strains have started to show, with many investors pulling back from the debt-like savings products which drove the leverage to dangerous levels. Some trust products have been forced to delay payments, while China has doubled down on steps to cut leverage in the financial system. These cracks could cause chaos.
Banking System Reform Failures
There has been a lot of work done to change banking culture since the 2008 global crash. Many borrowers spend extra time seeking out options available to them outside of high street banks, such as investing, trading with Oanda and looking towards independent lenders.
While there was greater regulation put in place, all the reforms that were needed to protect the system from reckless behaviour haven’t gone through. Governments and regulators are those who hold most of the blame, with complacency and a backlash against international agreements introducing plenty of risk to the sector. It is this lack of action and the undermining of efforts to increase regulation that mean another crisis could emerge.
Unless rising public debt, shadow banking and poor regulation is tackled, the future of the world’s economy could be in the balance.