Protecting Financial Stability: Lessons from the Coronavirus Pandemic

Abstract

The coronavirus pandemic has produced a public health debacle of the first-order. But, the virus has also propagated the kind of exogenous shock that can precipitate—and to a certain degree has precipitated—a systemic event for our financial system. This still unfolding systemic shock comes a little more than a decade after the last financial crisis. In the intervening years, much as been written about the global financial crisis of 2008 and its systemic dimensions. Considerable scholarly attention has focused on first devising and then critiquing the macroprudential reforms that ensued, both in the Dodd-Frank Act and the many regulations and policy guidelines that implemented its provisions. In this essay, we consider the coronavirus pandemic and its implications for the financial system through the lens of the frameworks we had developed for the analysis of systemic financial risks in the aftermath of the last financial crisis. While today’s pandemic differs in many critical respects from the events of 2008, systemic events in the financial sector have a common structure relevant to both crises. Reflecting back on responses to the last financial crisis also affords us an opportunity both to understand how financial regulators are currently responding to the coronavirus pandemic and also to speculate how the pandemic might lead to further reforms of financial regulation and other areas of public policy in the years ahead.

Keywords: Systemic Risk, Pandemics, Macroprudential Regulation, Financial Regulation, Public Health Policy

JEL Classification: G01, G20, G38, H12, I18, K23