Problems Caused by Financial Crisis “Will Take Years” to Fix: SF Fed President

In remarks at a conference with Asian Banking leaders, San Francisco Federal Reserve Bank President John Williams said that though the global banking system is in better shape than it was three years ago, it remains “vulnerable:”

The European sovereign debt crisis threatens banks in that continent, and, by extension, elsewhere. Clearly, it represents a significant threat to financial stability. In the worst case, the European crisis could undermine the financial improvements in North America and Asia. But this crisis is by no means the only risk. Economic trends in many parts of the world appear to be deteriorating. Although growth in the United States remains moderate, Europe looks to be in recession. And, in China, recent indicators point to a marked deceleration in growth. Many large global financial institutions remain highly leveraged and rely on volatile wholesale funding. Others are still working through troubled loan portfolios. Efforts by regulators to close loopholes exposed by the crisis remain a work in progress. They will take years to complete.

Williams also noted that although Asia was somewhat better prepared for the near-collapse of the global financial system due to having gone through its own banking crisis a decade earlier, Asian countries faced some of the same challenges as US and European banks:

And it wasn’t just Asia’s financial sector that got hit. The recessions in the United States and Europe spilled over to Asian economies through trade and investment channels. As in the West, consumer confidence fell and domestic demand for loans dropped sharply.

Williams said that Asia played a major role in keeping the global economy and financial system from an even worse meltdown, calling out China’s rapid growth and bond buying by “several Asian institutions.”

The full text of Williams’ remarks are available here.

Paul Ausick