Finance

Published: Mar 13, 2023
Updated: Mar 13, 2023

The Fragility of the Global Financial System: An Analysis of Recent Crisis- SVB Collapse and Possible Contagion?

The world has experienced several crises in recent times, including the 2008 financial crisis and the 2020 pandemic-induced economic crisis. In retrospect, central banks' stimulus measures should have been curtailed earlier to prevent potential inflation. However, the weaponization of FX reserves, energy supplies, and consumption, the de-dollarization of the economy, and deglobalization have made the financial system even more fragile. The financial sector is over-leveraged, with financial outstanding amounting to 400% of actual global GDP, raising concerns about how to reduce central bank balance sheets without causing a crash.

The 2008 Financial Crisis:

The 2008 financial crisis started in the United States, where banks had been providing risky loans to borrowers who could not afford them. The crisis soon spread to other parts of the world, causing significant economic turmoil. The crisis showed that the global financial system was interlinked and that a problem in one region could quickly spread to other areas.

The 2020 Pandemic-Induced Economic Crisis:

In 2020, the world experienced a pandemic-induced economic crisis that resulted in central banks and governments infusing liquidity into the system. While this approach contained the crisis, it has also led to potential inflation, which could have long-lasting effects.

The Weaponization of FX Reserves and Energy Supplies:

The weaponization of FX reserves and energy supplies has added to the complexity of the global financial system. Countries are now using these reserves and supplies as bargaining chips, leading to an even more volatile financial system.

The De-Dollarization of the Economy:

The de-dollarization of the economy is another factor contributing to the fragility of the global financial system. Countries are moving away from the US dollar as the global reserve currency, leading to a potential loss of confidence in the currency and its value.

The Fragility of the Financial Sector:

The financial sector is over-leveraged, with financial outstanding’s amounting to 400% of actual global GDP. This has led to concerns about how to reduce central bank balance sheets without causing a crash. The recent mini-crisis involving the 15th largest US bank has raised concerns about the potential contagion effects on the global financial system.

Contagion could trigger a financial crisis world-wide

The fragility of the global financial system is a cause for concern. While central banks and governments have managed to contain recent crises, the underlying issues remain. There is a need to reduce the over-leveraging of the financial sector and address the weaponization of FX reserves and energy supplies. Failure to do so could lead to another global financial crisis with far-reaching consequences.