The curbs on activities means that banks are no longer able to provide as much market liquidity to the extent they did before the Lehman collapse. For several years, this was not really a major problem because central banks were flooding the markets with quantitative easing (QE). But that support is now being withdrawn, and the onus is on other market participants to bridge the funding gap. So far, they are doing so, but it is uncertain whether there will be sufficient liquidity in the event of another crisis. Banks would usually deploy capital at such times, but as banks can no longer act as the liquidity buffer, the markets may find themselves on their own when trouble hits.
The financial landscape looks very different today than it did in 2008, when the collapse of Lehman Brothers almost brought down the entire financial system. Investors face challenges in a post-stimulus era with tighter liquidity, higher interest rates, and more volatility, but also potential opportunities. Flexibility and an active approach are crucial.
Disintermediation of banks
In the post-crisis period, a raft of regulatory measures were introduced to improve the resilience of the financial system — and these fundamentally changed the way that commercial banks operate. Banks are now required to hold a greater quantity of better-quality and more liquid capital, which restricts their activities and their ability to hold risk assets on their balance sheet. This has driven disintermediation away from banks to nonbanks, which are now holding much more risk than they did before. This is a concern.
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