By far not all the lessons of the 2008 financial crisis have been learned. And those that have been learned have not necessarily been applied. Nevertheless, one of them – drawn and applied – will certainly have been of great help in the current crisis.
At least it has helped to limit the economic catastrophe: the need for well-capitalized banks. This is what can be drawn from Bank for International Settlements (BIS) December 2020 report.
BIS, aka central bank of central banks, says that the banks have served as a “reliable first line of defense” and that “backed by swift action by the authorities, banks helped to limit economic stress at the beginning of the pandemic”.
I must stress the fact that the starting point of 2008 crisis is very different than the actual one. Back then, the crisis came from a freewheeling financial sector, overwhelmed by bets on sub-prime mortgages, which have proved to be much more dangerous than expected. Poorly capitalised, many banks that had considered risk management as a trivial activity found themselves on the brink of collapse, with some having to seek state support. In the actual case, the crisis did not initiate from the financial sector and it affects entire global economy.
I would like to provide some numbers from the report at this point: International bank lending to financial and non-financial borrowers fell by 5.2% in 2008. Conversely, these same loans increased by 4.8% in the first half of 2020. This, “even though economic activity has contracted more than during the great financial crisis of 2007-2009”, the authors of the study point out. The decline in global growth was 0.2% in 2008, compared with -9.1% in the first half of this year.
The authors of the study add that “foreign lending to the non-financial private sector – a measure of credit to the ‘real economy’ – has also remained robust”. In the first six months of the year, they fell by only 0.5%, compared to a drop of 11.8% in 2008. Similarly, local loans in local currency also grew at the historically high level of 8.6%.
I believe one must admit that the vast measures and assistance of governments, such as state guarantees for loans, have also helped. Central banks ensuring the supply of liquidity prevented the health crisis from turning into a financial crisis.
