Financial Stability in the Aftermath of COVID: Figures, facts, prospects
Udara Peiris, Associate Professor of Finance at ICEF, hosted a webinar that dealt with how the toll of the COVID crisis on human lives has caused new financial risks and impacted the real economy. His analysis of the responses of governments, Central Banks, and financial regulators can shed more light on ways to get economies back on track.
The year 2020 has created unprecedented stress, new financial risks and the tragic impact on healthcare around the world. Over the last 50 years, there have been several major global financial crises. In the 1970s there was a crisis to do with the price of oil and there was a recession associated with this and inflation. Late 80s, there was a stock market crash, which coincided with the end of Japan’s ‘economic growth miracle’. In the 1990s, there was the Asian Financial Crisis, then in 2007 the global financial crisis. All these crises were essentially financial crises preceded by an overvaluation of financial assets and high levels of leverage.
The economic declines we have experienced is has not been globally seen since WWII
The impact on economies has parallels to what happens during times of war: a significant disruption in the supply chain, in labour, and especially the movement of labour. In that sense, this crisis is very different from those major crises that we have faced since WWII, and so the remedies need to be different. Whereas in a financial crisis you needed to address inefficiencies, mispricing and externalities coming from the financial sector, here what is more important is how to stimulate the real side of the economy, how to get investment re-started.
In his presentation, Professor Peiris also touched upon unemployment in the U.S., the global impact on GDP levels and debt ratios across mature markets. The increase in public debt, which, for example, in the UK has risen 50% (vs. GDP) over the period from 2019 to 2021, is unprecedented out of war time in advanced economies.
The banking system is being encouraged to lend to companies, but these companies are borrowing at a time when it is extremely difficult for them to operate, which means that the loans and the assets of the banking system accumulate risk. At the same time the government has issued debt which is increasingly held by the banking system restricting the available funds to the private sector.
Through facilitating and supporting loans from the banking system to the business sector, as well as through reinvestment programmes and new creative approaches can governments, central banks, and regulators steer the economy forward.