The writer is a former chief executive of HSBC
My 30 years in banking have been heavily shaped by crises, particular the Asian financial crisis in the late 1990s and the 2008 global financial crisis. My mentor through both taught me to think about a crisis not as a single event, but as a series of episodes, much like waves breaking on a beach.
The aim was to challenge the understandable psychological desire to anticipate the end — this tendency makes us want to believe the current wave is the last, when it very rarely is. The teaching forced us to keep scanning the horizon for the next wave and prepare accordingly. Hindsight is a wonderful thing, but as we navigate this global health crisis, I see some interesting parallels with the past.
Once again we have been reminded to look for vulnerabilities caused by global flows that on their face seem to be a good thing.
Before the Asian crisis, the flow of capital from the developed world into the emerging markets was widely celebrated. It solved the dual problem of meeting western investors’ needs for higher returns, and the need for investment in many emerging markets. We didn’t spend enough time asking what would happen if the flows reversed. The answer turned out to be currency devaluations, mass unemployment, and IMF rescue programmes.
Today, the problematic flow involves people. A new respiratory disease in Wuhan, if it had emerged in the late 1990s, probably would not have spread so far or had such significant consequences. By 2020, the expansion of China’s domestic transport infrastructure had allowed significant growth in the movement of people within China. Those domestic flows coupled with rapidly increasing cross-border flows allowed a localised health problem to become a global problem. Many of us were too slow to anticipate this possibility.
My personal period of peak anxiety during the global financial crisis of 2008 occurred when we understood that there was a significant amount of bad risk in the financial system (assets that were worth much less than the system was recording), but we didn’t know where the risk was. For example, we knew the extent to which subprime mortgages had been securitised, but we didn’t know who the ultimate owners now were. So assessing counterparty risk was difficult if not impossible.
We have a similar problem now with the Covid-19 virus. We know it is in our system, but in most countries we don’t know where, and the policy response from many governments is necessarily blunt as a consequence. Effective risk management requires an understanding of where the risk in the system resides so that the appropriate action can be taken to mitigate the risk and reduce collateral damage.
When this crisis has passed it will be fascinating to compare the efficacy of various policy responses between those governments that did seek to map the risk in their system (such as Singapore and South Korea) versus those that did not.
Understanding where we were in the global financial crisis was often hamstrung by a plethora of different regulatory standards governing capital and liquidity. This was further compounded by different accounting standards. We are experiencing a similar issue with Covid-19 data.
Comparisons between countries are challenging for a number of reasons. Each country has its own method for collecting and aggregating data. Proper analysis can only be achieved if the data upon which the comparison is made is assembled in a uniform way. Different approaches to testing mean that we are not able to compare the rate of progress of the disease in any particular country with another.
In the global financial crisis we quickly learned that the liquidity and capital buffers were simply inadequate for the risks inherent in the system. Over the course of the last decade these buffers have grown significantly. Society has willingly paid the bill either via lower returns on banking equity or via increased costs of intermediation.
We are learning much the same about the inadequacy of buffers in the healthcare systems in many countries. The buffers may be expressed in terms of the number of spare intensive care beds, the stock of personal protective equipment for healthcare workers and — perhaps most significantly for this Covid-19 crisis — the stock of ventilators. Whichever measure you choose, it seems clear that for a world that is susceptible to a respiratory pandemic, the buffers in the system are inadequate.
The financial system has made impressive progress in addressing its vulnerabilities in the post crisis period. The Financial Stability Board deserves much credit for this. We now have the opportunity to apply what we learnt about protecting the financial system to the world’s healthcare systems.
Source: Economy - ft.com
