The financial sector under stress

29 June 2009

The analysis of the crisis in this chapter leads to a variety of conclusions and highlights a number of risks for the financial system. In a modern financial system, bank-based finance and market-based finance should be viewed as complementary rather than as rivals or substitutes. The crisis revealed that the presumed benefits of diversification derived from the creation of financial conglomerates - the hypermarkets of the financial system - were an illusion. When the crisis hit, all business lines were affected. Similarly, the benefits of slicing risk into its smallest components through financial engineering were oversold. However, reducing the size of the bloated financial industry should not be confused with a recommendation of financial autarky. The retreat of finance back inside national borders must be resisted. If left unchecked, the process would result in protectionism.