What’s changed since the 2008 financial crisis in four charts
This month will mark the 10-year anniversary of Lehman Brothers’ collapse. In many ways, the global financial system is better off as a result of the extraordinary stabilization measures taken after 2008. But some familiar risks are creeping back, and new ones have emerged.
1. Global debt has continued to swell since the crisis, with government debt rising by $31 trillion.
Underneath that headline number are important differences in who has borrowed and the sources and types of debt outstanding. Governments in advanced economies have borrowed heavily, added $31 trillion. But less noticed is that nonfinancial company debt has grown by nearly as much. China alone accounts for more than one-third of global debt growth since the crisis. Households have reduced debt in the core crisis countries, but it continues to grow in a range of other countries, including Canada, Australia, and China. Nonbank lending is on the rise, including from corporate bond markets, private credit funds, nonbank mortgage lenders, and P2P lending platforms.
2. Banks are safer but less profitable.
In the past decade, banks have dramatically increased the amount of capital and liquid assets they hold, lessening the risk of insolvency. But many based in advanced economies have not found profitable new business models in an era of ultra-low interest rates and new regulatory regimes. The return on equity of banks has fallen by half since before the crisis, and is now below the cost of equity. This increases pressure on banks to review their product mix, adopt digital solutions, and review business lines.
3. The global financial system is less interconnected — and less vulnerable to contagion.
Global cross-border capital flows are down by more than half since the 2007 peak. Global banks have retrenched, led by Eurozone banks reducing their foreign claims. Foreign direct investment is now a larger share of capital flows, a trend that promotes stability. Meanwhile global imbalances between countries have declined.
4. But some risks bear watching, such as growing non-financial corporate debt.
Three familiar sources of risk bear watching. First, non-financial corporate debt has grown by $39 trillion globally, and credit quality is declining in the corporate bond market. The growth of corporate debt in developing countries poses a particular risk when it is denominated in foreign currencies. Second, real-estate prices have soared to new heights in sought-after property markets, although these run-ups tend to be localized and crashes are less likely to cause global collateral damage. Third, China’s debt has grown rapidly, particularly in the real estate sector, local government financing vehicles, and loans coming from the nonbank “shadow banking” system.
The good news is that most of the world’s pockets of debt are unlikely to pose systemic risk — or the domino effect of losses in one corner of the market rippling outward with devastating effects throughout the system. The trillions of dollars of collateralized debt obligations, privately created asset-backed securities, and credit default swaps that were riding on US subprime mortgages have all but disappeared. So while there may be losses in some corners of the global financial system in the years to come, they are unlikely to produce a 2008-style meltdown.
But the world is full of unknown risks, too, like the impact of high-speed trading by algorithms, the growth of cryptocurrencies, and the possibility of cyber attacks. As our collective memories of 2008 fade, the biggest danger may be complacency. If the white-knuckle ride we took a decade ago taught us anything, it’s the importance of being vigilant when times are still good.
In a new perspective on the financial crisis, we build on a decade of research on financial markets to look at how the landscape has evolved since 2008. Read more in our new discussion paper, A decade after the financial crisis: What has (and hasn’t) changed.
