malcolm edey : reflections on the financial crisis address by mr malcolm edey, assistant governor ( financial system ) of the reserve bank of australia, to the cfo summit 2014, gold coast, 16 march 2014. * * * thank you to our hosts for the opportunity to speak here today. i have called this talk “ reflections on the financial crisis ”. that might seem like a somewhat dated and backward - looking focus. after all, it is now roughly seven years since the early signs of trouble in the us sub - prime mortgage market first came to general attention, in the early part of 2007. it is 5½ years since the failure of lehman brothers brought the crisis to its most severe phase. and it is almost exactly five years since the markets and economies that were worst affected began their gradual path to recovery. five years is a long time in economics. but one of my themes today is that financial crises are costly events, and one of the reasons they are so costly is that their effects can continue long afterwards. the after - effects of the latest crisis are still with us and, i expect, will continue to shape the business environment for some time to come. it needs only a few facts and figures to convey the impact of the crisis at its height. in the world ’ s largest economy, national income and output fell by about 4 per cent over the year to june 2009. that made it by far the sharpest us recession of the post - war period. in the euro area the peak - to - trough fall in output was even larger at around 6 per cent, and in the uk it was 7 per cent. these are big numbers when you remember that in australia ’ s most recent recession, in 1991, output fell by less than 2 per cent. the contractionary effects around the world were particularly concentrated in trade and industrial production. some of the economies in the east asian region posted declines in those variables of the order of 30 per cent in the space of just a few months in late 2008. and of course financial markets were severely affected. global equity prices fell by around 40 per cent and there was a major dislocation in debt markets. on all of these counts, the recent crisis was certainly the most severe since the depression, and in that sense it might be thought of as the kind of once - in - a - lifetime event that helps to define an epoch. that background suggests a number of interesting questions that i want to think about today : • why was

regulatory framework. the post - wallis framework that was put in place in 1998 established apra as the integrated prudential regulator, affirmed the financial stability role of the rba and set up the council of financial regulators to ensure appropriate coordination among the regulatory agencies. under apra ’ s leadership, australian banks were held to much higher standards of resilience than many of their international counterparts. the banks remained profitable and well capitalised. loan performance did deteriorate during the crisis period, but nowhere near as much as it did in the north atlantic economies. my general conclusion from all of this is twofold : the risk of at least low - level crises is never too far away, so we shouldn ’ t be complacent ; but good policy can make a difference in containing that risk. in what ways are the after - effects of the gfc still continuing? the economic impacts of financial crises can be costly and long - lasting. that is why the risk management effort is so important. the reinhart and rogoff study that i cited earlier assembled some interesting data on the size and duration of impacts from financial crises in history. they found that the average duration of impact from a major financial crisis on variables like output and employment was about four to five years. given that the gfc was a more severe crisis than average it is not surprising, then, that significant effects are still continuing, five years or more after the event. however, the effects have not been evenly distributed around the world. they have been concentrated in the north atlantic economies and, in important respects, they have been most severe in europe. i have very few slides in this presentation, but if i had to pick a single chart to illustrate the evolution of these effects it would be the following one ( graph 1 ). bis central bankers ’ speeches graph 1 it shows non - performance rates on assets in the major banking systems. the initial deterioration in asset quality was sharpest in the us – not surprisingly, since the crisis originated there. non - performance rates on us banking assets peaked in early 2010 and there has since been a gradual improvement. the uk experience has been broadly similar except that the peak was higher and came about a year later ; but, as in the us, a recovery is now clearly underway. the experience in the euro area has been very different. it was marked by a more gradual initial deterioration but one that is still continuing. non - performance rates in europe are now around 8 per cent of