Answer to Question #186431 in Finance for Claudia

Question

Explain the similarities and differences between the global financial crisis of 2007-9 and the Covid-19 pandemic in terms of the challenges for central banks in addressing these situations.

Answer 1

The economic crisis due to the coronavirus is not only and not so much financial, but also structural and economic. It does not concern the inflated derivatives bubble, as in 2008-2009, but the temporary suspension of most industrial enterprises and the service sector.

At the moment, the main difference between the current crisis and the global crisis of 2007-2009 is that the huge gaps in the payment chains in the real economy and the high dynamics of prices for basic commodities have not yet led to banking crises. An important difference is also the generally more stable financial condition of the global banking system due to the significant increase in capitalization and the restrictions of the Central Bank, which do not allow banks to take large risks. To date, there is no liquidity crisis among banks. Also, in the conditions of quarantine and suspension of production, the states of different countries actively support their population and companies. Many central banks have eased their lending conditions by loosening the way mandatory standards are calculated and have provided additional funds to banks. These measures helped to reduce the possible pressure on the banking sector in the event that borrowers are unable to service their obligations due to falling demand for manufactured goods and services and lower wages.