The Real Credit Crisis

How Governments and Financial Services can work together to speed economic recovery

The Global Financial Crisis of 2009 was dubbed by many as the Credit Crisis. In retrospect the term was used incorrectly to describe a mortgage mispricing and real estate leverage crisis. What we face today is rapidly becoming the real credit crisis of our times

A situation in which many households and companies, already highly leveraged, are taking on more debt; a situation in which many firms across industry sectors are unlikely to be able to sustain this debt; a situation in which governments and the financial system have to be poised to work together to absorb some of the financial losses, keep good businesses alive, and help speed the economic recovery.

The stimulus response by public authorities worldwide to COVID-19 has been massive and for the large part well targeted to prop up the dramatic liquidity risks. Now significant risks are growing in the economy due to credit misallocation, increased solvency risks for corporates and small and medium-sized enterprises (SMEs), and the risk of spill-over into failures in parts of the financial system.

The global economy is going to emerge from this crisis in desperate need of growth. Public authorities must work in tandem with the financial services system to address these issues in order to speed the economic recovery. The stimulus must be spent wisely — governments are not a source of unlimited funds. Policymakers need a more targeted approach to credit provision and will rely on banks’ expertise to achieve it at scale. Banks’ expertise in restructuring troubled companies will become increasingly important, as well as their critical function in traded debt and other financial markets.

Authorities can improve banks’ ability to play these crucial roles, and to support growth, with a series of actions that fall into the following categories:


  • 1Course-correct on credit provision to small and midsized businesses

    Much of the lending stimulus today is not getting to the right businesses. Fixing this requires an assessment of credit availability and the operational capacity of the banking system and finding fast solutions. When necessary, authorities must simplify existing measures or extend their scope to address blind spots.

  • 2Prepare to manage a potentially large corporate solvency crisis that will arise after the initial liquidity support

    Authorities will need to assess the preparedness of their bankruptcy systems and the potential impact of credit losses on their banking systems, and make strategic decisions on how and where to stimulate equity capital support to troubled businesses that can drive future growth. New restructuring vehicles are likely to be required.

  • 3Prepare to intervene in parts of the financial system as second-order financial stability issues arise

    Good decisions have been made on the use of capital buffers and forbearance. But the risks are rising that some financial institutions will remain structurally weak or even fail. Authorities will need to be ready for intervention. Resolution planning efforts carried out in the last 10 years may come to a real test for the first time in several countries.

  • 4Planning loss absorption for future outbreaks

    Systemic risks are rising relative to diversifiable risks, and this means greater government steering of loss absorption is here to stay and needs planning. Specifically, to simulate confidence in the right growth credit and capital now, we believe a better-designed sharing of loss absorption between government, business, investors, banks, and insurers is required. The urgent priority today is to put in place a systemic solution to pandemic re-insurance.

Across all four actions, authorities and banks need to work together with co-ordinated  action. Planning needs to be scenario-based, and further serious COVID-19 outbreaks need to be included in the medium-term scenarios. Our COVID-19 Pandemic Navigator Toolkit is the most comprehensive set of decision-steering tools being used today by governments, health organizations, and financial institutions.

The decisions authorities make and the actions they take in the coming weeks and months to address these four issues will have significant, long-term ramifications for how economies emerge from this crisis, and for years to come.

Francois Franzl, Lisa Quest, Patrick Hunt, Doug Elliott, Barrie Wilkinson, Dylan Walsh, Dov Haselkorn, Edwin Anderson, Hang Qian, Maria Fernandes and Eric Czervionke also contributed to this report.

The Real Credit Crisis