Such reforms will take time. Immune system The situation in Europe illustrates how difficult it can be to curb a crisis once it has arisen. It might therefore be wise to give priority to crisis prevention. A healthy economic system is less vulnerable. Crises can be curbed – or even avoided – by boosting the resilience of the economy. Rather than treating the disease after it has taken hold, much can be accomplished by strengthening the economy’s immune system. The financial crisis revealed deficiencies and system failures worldwide. Many governments and households had taken on too much debt. US investment banks such as Lehman Brothers operated a high-risk business model with low levels of equity. European banks were too dependent on short-term funding in international markets. In a period of growth, it is easy for banks to obtain funding. But the system is fundamentally unstable. Without adequate capital requirements in the banking system, credit growth can spiral out of control. Hayek gave lectures on this topic at the London School of Economics in the early 1930s. 4 The LSE is still home to many economists who argue against the risks of debt-financed growth. 5 Solid banks are built in good times. Solid banks bolster the resilience of the economy and make crises easier to manage. Since the financial crisis, the G20 countries have implemented substantial changes in the global regulatory framework for banks.
In such a case, what at the very beginning could be perceived as a more relaxing financial environment that would provide a competitive priority, would soon leave the place to recycling of problems that were at the root of this crisis, decreased investors’ confidence and increased financial and social costs for recovery. Naturally, each country will adapt these standards to the degree of current financial system development, its composition and depth, as well as to its outlook. It is important to emphasise that these measures would be insufficient, if not accompanied by more general policies, aiming at diversifying sources that contribute to economic equilibrium growth, financing the economic agents, improving the legal framework of business development and following sound macroeconomic policies. Allow me now to deal with the situation of our financial system and share with you some stances, which we have generally discussed even previously. The stagnant situation of the financial system during the last year was dictated by the banking system performance, because of its weight. The rest of the financial system, represented by insurance companies and other non-bank financial institutions, underwent a good growth. Regardless of this, their share to the financial system remains low. The banking sector was faced with liquidity constraints in the last quarter of 2008 and in the first quarter of 2009.