Have we learned from history – Current crisis vs. 2008

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.

FINMA 2020 Risk Monitor

FINMA independent supervisor of the Swiss financial market, has published its annual Risk Monitor. This report specifies the most important risks that supervised institutions are currently encountering and portrays the focus of FINMA’s supervisory activity.

After having reviewed the report, I can easily say that the omnipresent word is undoubtedly COVID. The pandemic has triggered a whole series of pressures on financial institutions, like everywhere else in the world. According to FINMA, the main pressure stems from the risk of losses on loans to foreign companies.

In mid-2020, Swiss banks held claims on foreign companies totalling USD 78.1 billion (CHF 72 billion), according to figures from the Bank for International Settlements.

According to Swiss National Bank statistics 75% of these loans are held by two biggest banks, Credit Suisse and UBS. Coupled with bankruptcies and international fraud in the first half of the year that Swiss banks faced in commodity trade finance segment, I believe it is safe to say that FINMA will be monitoring the activities of the banks ever more closely.

As for the other main topics or the report, I think the most important ones are the critical exposure of insurance companies to pandemic-hit bond markets as well as a probable bursting of a real estate bubble. Low and/or negative interest rates are further complicating this story in my view.
On the other hand, FINMA considers the risk of domestic credit losses to be lower in Switzerland. Although, the recession was less severe in comparison with other countries and the economy was supported by public measures, I believe as we enter a long and bleak winter with degrees of confinement all over the country, a series of bankruptcies especially in hotels, restaurants and transport as well as jobs cuts across sectors is inevitable.