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Tuesday, 29 November 2016 21:56

Barbara Daroca: How Ready are we to Face the Next Financial Crisis?

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With the end of the year approaching and in the light of major international political changes, it is difficult to forecast how markets will evolve in the future. 

Last Tuesday 15 November at the European Convention Center, I attended the Financial summit that addressed the topic “How to anticipate the next financial crisis”. Ian Bright - Managing Director at ING Group Research – expert in behavioural economics was invited to share his views on this topic.

Ian stressed the fact that it is all about the behavior of people and that this behaviour is not as rational as you might think.

With regards to the next financial crisis, he noted that the level of household debt is high and increasing in a majority of European countries. At the same time, evidence from the ING International Survey since its inception in 2012 shows consumer finances are fragile. I find it surprising that more than three Europeans in ten do not have any savings according to the surveys and for those that do have savings often these do not cover three months of expenses. It is easy to see how this is something we should all be anxious about.

Concerns extend beyond financial arithmetic. Many people appear unaware of the financial risks they take. Knowledge of basic financial concepts such as compound interest and the effect of inflation on purchasing power is low. And if people do not understand how such concepts can influence their financial situation, how could they possibly prepare themselves for a financial crisis? There is a clear need for better financial awareness. Even in Luxembourg, a key European financial player, only 53% could answer three of five basic questions about financial concepts correctly.

Moreover, 61% of people in Luxembourg agree with the statement “house prices never fall” while at the same 89% believe house prices to be expensive. This inconsistency coupled with low savings makes a dangerous combination. Ian Bright believes that people are trapped into buying a property even though they think it is expensive.

But it’s not a doomsday scenario! Ian doesn’t think we should be worrying about anticipating the next crisis. Instead, we should ensure structures – whether that be markets, insurance systems and knowledge bases - are developed that provide protection against the complexity of modern financial systems.

This is exactly why at ING Luxembourg we started our blog mymoney.lu: with easy to digest posts about everyday finance, we strive to help people understand better what is going on, what choices do they have and what risks they need to be aware of. Only by providing the right information can we empower people to stay a step ahead in life and in business.

 

Barbara Daroca

Barbara Daroca is the Head of Corporate Services at ING Luxembourg.

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