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The financial part of the Covid crisis isn’t over

Officials may be much better prepared for a second shock than in 2008.
Image: Bloomberg

So far, the US financial system has survived the initial shock of the coronavirus crisis, thanks in large part to the Federal Reserve’s aggressive containment efforts. But another shock may well be coming, as millions of people and businesses fall behind on obligations such as mortgages and corporate loans. It’s a threat for which officials need to be much better prepared.

The experience of 2008 demonstrates how damaging a second shock can be when it hits an already weakened financial system. A year after the first signs of distress appeared, a series of disasters outside the traditional banking system – including the bankruptcy of Lehman Brothers and the near failure of giant insurer AIG – caused a simmering crisis to erupt. Regulators were caught off guard, lacking essential information such as the size and nature of counterparty exposures to Lehman. The repercussions overwhelmed poorly capitalised banks, requiring widespread government support and turning an already bad recession into the worst since the Great Depression.

In response to that episode, officials tried to safeguard the system. Lawmakers required banks to operate with more loss-absorbing capital, and created two entities – the Financial Stability Oversight Council and the Office of Financial Research — to identify and address emerging threats to financial stability wherever they might arise. The FSOC, headed by the Treasury secretary and including the leaders of all relevant agencies, could designate any nonbank financial company as posing a threat to systemic stability and hence subject to enhanced oversight by the Fed. The aim was to close the gap that allowed Lehman and AIG to escape federal oversight. The FSOC could also recommend that member agencies address systemic risks posed by firms or activities they regulate. The OFR was supposed to promote data standards to improve private and public oversight and gather the information needed to help the FSOC identify threats.

Neither the FSOC nor the OFR has lived up to its potential. Under the Trump administration, the FSOC has reversed or abandoned all its nonbank designations. The OFR has issued only one rule, has never used its broad authority to subpoena information, and has been strangely quiet during the pandemic. Both bodies have been allowed to atrophy, with the OFR’s staff shrinking by more than half.

It’s not too late for the FSOC and OFR to play a useful role in containing the Covid-19 crisis. The FSOC can, for example, meet more regularly and create groups to address specific issues, as it has for mortgage servicing. Potential hot spots flagged in the Fed’s Annual Financial Stability Report include large hedge funds and life insurance companies. Treasury Secretary Steven Mnuchin, as Chair of the FSOC, should be in close contact with all FSOC members to identify emerging fragilities. The OFR, for its part, should ramp up hiring, and make more use of its authority to bring in outside experts from academia, industry and other regulatory agencies to compensate for internal shortcomings.

Looking further ahead, the FSOC should recognise that it can’t properly oversee financial activities unless it has better information about what’s going on in the entities that conduct those activities. It must find a way –- through the nonbank designations or otherwise — to bring a broader set of institutions into the purview of federal regulators while accommodating their unique business models. The FSOC and OFR should also prioritise data standardisation. Requiring all entities that engage in financial transactions to have a Legal Entity Identifier, for example, would facilitate private risk management and make it easier for regulators to trace counterparty exposures and identify potential hazards.

Ultimately, Congress should revisit the structure of the FSOC and OFR. The OFR needs greater independence from Treasury, so it can use its powers more freely to gather data, identify trouble spots and take positions at odds with the administration. The FSOC’s member agencies should be encouraged to cooperate in addressing systemic risk – for example, by including resilience and financial stability in their mandates. And legislators should work with the administration to accelerate the political appointment process and fill vacancies.

Officials can’t head off a catastrophe unless they can see what’s going on and are paying attention. Although there’s no quick way to cultivate competent staff or fill vast information gaps, concerted efforts could reduce the probability that a second shock will send the financial system into a tailspin.

© 2020 Bloomberg

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.0004% death rate in South Africa. In America they keep saying 98% recovery rate??????????????????????????????????????????????????????

The 2008 financial crises just crysalused moral hazard not learning and they just postponed what should have been creative destruction.

Since then inequality levels have just risen and the debt never got paid back. Much of the debt just got transferred from private sector to the citizens.

And now unemployment levels are reaching precedent levels everywhere and debt levels are rising to unsustainable levels all on the idea that you can trust the US Dollar as the world’s reserve currency.

This time they only way out may be to change the financial system completely.

I remember Black Monday on Oct. 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. I was working in DNB, London and the crash marked the beginning of a global stock market decline, hence Black Monday became one of the most notorious days in financial history.

I then moved to their DNB, Bergen Norway – and in 1989 got a Déjà vu – ‘’The Panic of 89’’. Ronald Reagan, the US President went on TV and issued a proclamation – All the exchanges would remain closed and a three-day national holiday was announced.

The US had a looming recession in 89 – and the oil was getting the effects of both a glut and a fallout in energy needs simultaneously. Mexico was pulling the rugs from under the Banks (US$ 12 per barrel, with the possibility of US$ 7 next).

The Banks started selling Bonds – Bank credit would dry up and interest rates would still go higher. Wall Street started collapsing and set its largest drop in one session. Chaos ensued on the New York Futures Exchanges and the commodity Futures in Chicago.

Mexico, Venezuela, and Brazil – started to run the risk that they could go broke – the futures markets confirmed that their income from oil, coffee, soybean oil is going to sink rapidly and that the interest rates on their sovereign loans are going to soar rapidly.
The US Fed intervened in the Forex market to prop up the US $ but there was no power in the land (public or private), which was able to intervene on the New York Stock Exchange to prop up the value of IBM or General Motors. The prices of everything were collapsing, except Gold.
These types of scenarios and market crashes have become the norm lately – I think it’s important to remember, when buying shares, there should be one rule to remember – ‘’you are not an owner. You are not an Investor. You are not an employee, customer, or stakeholder. You are not a patriotic Citizen, waving the country’s flag, glad to go along in the name of freedom – You are in it for The Money’’!
There were lots of crashes after this – The Dot.com Bust of 2000, The Great Recession Financial Market Crash of 2008, etc. But with the Chinese Sneeze – Govind 19 crash came from nowhere – and it also seems to go nowhere now!

The financial consequences will not be eliminated by reckless lending to zombie scarecrows. The distribution mechanisms will inevitably be biased as already witnessed and as with similar traditions.
This generic lock down reaction is being assessed as the greatest blunder in human history and yet it continues apace with the threat of never ending until a successful vaccine has eradicated the possibility of a single further infection.
Counting sheep has been replaced with counting lemmings.

End of comments.

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