The Financial Part of the Covid Crisis Isn’t Over

So far, the U.S. financial system has survived the initial shock of the coronavirus crisis, thanks in large part to the Federal Reserve’s aggressive containment efforts. But another shock may well be coming, as millions of people and businesses fall behind on obligations such as mortgages and corporate loans. It’s a threat for which officials need to be much better prepared.

The experience of 2008 demonstrates how damaging a second shock can be when it hits an already weakened financial system. A year after the first signs of distress appeared, a series of disasters outside the traditional banking system – including the bankruptcy of Lehman Brothers and the near failure of giant insurer AIG – caused a simmering crisis to erupt. Regulators were caught off guard, lacking essential information such as the size and nature of counterparty exposures to Lehman. The repercussions overwhelmed poorly capitalized banks, requiring widespread government support and turning an already bad recession into the worst since the Great Depression.