The Next Financial Crisis Might Come Sooner than Expected

This month, a research group, the number crunchers at Oxford Economics, asked 162 global business the following question: What probability do you give that there might be a new financial crisis? The average answer was twenty percent over the next two years.

That is twice as high as the perceived of a second global wave of the Covid-19 pandemic. Moreover, sadly it is twice as high as the probability of an early effective vaccine arriving.

Those fears have tangible consequences. They pushed down business sentiment more in this month’s survey of Oxford than hard data justified. Jamie Thompson is the poll’s lead economist. He said that their analysis suggests that financial crisis fears account for much of the gloom.

That should concern investors. Nevertheless, not because a financial crisis will explode right now. At least not in the style of the 2008 recession. At least two factors are mitigating that risk.

The United States Federal Reserve and other central banks made it clear that they will do whatever it takes to keep markets functioning through the pandemic, to cite Mario Draghi’s 2012 promise. Events of the March were a case point. The Federal Reserve dived in with extraordinary liquidity support, then the United States bond market forces.

Banks are not the reason for this year’s economic shock. Also, they are much better capitalized in most of Europe and the United States than in 2008. Randal Quarles is a senior Federal Reserve official. He said that large United States banks entered the crisis in strong condition. The Federal Reserve has taken several important steps to help bolster the resilience of banks. A financial data group, Morningstar, said that the risk of capital crisis and insolvency for the United States financial system appears to be much lower this time.

Financial Crisis

Nevertheless, there is a rub. A financial crisis not always materializes itself in the same way it did with the collapse of the Lehman Brothers. There are times when financial stress emerged more insidiously. Purists can quibble concerning if such a scenario merits as a crisis. Nevertheless, the key point is that chronic stress can be very economically debilitating. That was obvious for the respondents to the Oxford survey.

Carmen Reinhart is the chief economist of the World Bank. So, Reinhart said that one problem haunting finance is that leverage at many institutions was sky-high even before Covid-19. She said that in the longer term, it is difficult not to be bleak if you look at financial sector vulnerabilities.

It is impossible to calculate the scale of eventual credit losses from Coronavirus. Meanwhile, the pandemic continues to rage. The general policy of credit forbearance conceals the damage. Hyun Song Shin is the chief economist of the Bank for International Settlements. So, he noted that the immediate liquidity phase of the crisis gives way to the solvency phase. Thus, banks will undoubtedly bear the brunt.

To cope with this, big United States banks have increased their reserves. Nevertheless, Reinhart fears that those in countries such as Italy and India are less prepared