Important issues of liquidity in global markets need to be addressed as banks are still not fully able to combat the stressed situations they faced during the global financial crash, former Clinton Treasury Secretary Larry Summers said Friday.
Discussing banking regulation, Summers said at the World Economic Forum in Davos that the raft of global rules that have built up in the last decade are not sufficient to deal with a new crisis.
"I think it's hard to argue that the system is not safer today than it was 10 years ago. There's more capital by many measures, there's substantial more liquidity, there are better procedures for resolving failed institutions. There's more transparency with respect to liabilities. There's more comprehensive regulation of systemic institutions, there's better procedures for international corporations," he said.
"At the same time, it does bear emphasis that if you look at a ratio that I have found relevant in some of my work — the market value of equity to the total value of assets for large banks — it's lower than it was in the decade before the financial crisis," he added.
He said this suggested that the cushion "is not all that we might think it is." While regulators have mandated much more book capital in the financial industry, the "dynamic capital" represented by future profitability in many cases has left the industry, he added.
"So do we have any basis for complacency? No. Are there important issues of liquidity in the functioning of markets in difficult circumstances that remain to be addressed? Yes," he said.
"Is this any moment for the wholesale repeal of the changes that have been made in the last eight years, suggested by some? No, I think that would be a grave mistake," he said, referring to Republican calls to ease Dodd-Frank regulations.
Speaking on the same panel, Barbara Novick, vice chairwoman at BlackRock, said she largely agreed with Summers' comments but suggested that the warnings of liquidity might be overdone. Speaking specifically about the bond markets and recent market moves, she said that concerns from many "were not that accurate."
Banking regulations have been a hot topic at Davos this year with the incoming Trump administration raising expectations that rules might be eased. On Thursday, Barclays Chief Executive Jes Staley detailed how his company had adjusted to the different banking regulations in the United States and added that he believed his peers in the sector need to get used to them.
"I think the Volcker Rule is very clear, they want to move Wall Street from managing proprietary and trading desks to being agents and broker dealers for the broader capital markets," he told CNBC at Davos.
"Barclays has gotten there very quickly, we are not in the proprietary trading business in our investment bank. We like the broker dealer model, we like the consistency of our revenues, we like the revenues versus risk that we have, which I think is where the regulators want us to be," he added.
