The global financial crisis 15 years ago left an indelible trauma for corporates and all asset classes. Global central banks reacted with soft monetary policies and stricter regulations. Have the wounds healed?
The global financial crisis was mostly tirggered by the collapse of the Lehman Brothers in 2007-08, wiping out an estimated $10 trillion economic output
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Regulation and more regulation—that’s how economies around the world reacted to the global financial crisis (GFC), mostly triggered by the Lehman Brothers collapse in 2007-08, which wiped off an estimated $10 trillion economic output.
The largest bankruptcy filing in the US crashed stock markets worldwide, punctured the confidence of global central banks and corporates, following which the US Federal Reserve injected liquidity to contain the financial shock. The recovery was slow. The global financial crisis—also referred to as the great recession—brought severe and permanent economic changes to the world.
“While the credit rating regulations were brought in (which India to her credit had in place before the crisis), there was more scrutiny over operations—separated ratings agencies from advisory services—to ensure there was no conflict of interest,” says Madan Sabnavis, chief economist, Bank of Baroda.
India was less affected by the crisis as regulators were cautious about financial engineering. “Products like credit default swap (CDS), collateralised debt obligations (CDO), mortgage-backed security (MBS) were in their infancy then,” adds Sabnavis.
Companies became more conservative in their capital structure and spends. “The Insolvency and Bankruptcy Code (IBC) is an outcome of the misallocation of capital that happened in the previous decade and the urgent need to find a way to help banks resolve non-performing assets (NPAs) and bring productive assets back...the government resorted to fiscal stimulus, resulting in high inflation and a weakening of the sovereign, reflecting in a sharp tumble in the currency,” says Vetri Subramaniam, chief investment officer, UTI AMC.
(This story appears in the 31 May, 2024 issue of Forbes India. To visit our Archives, click here.)