Similarities and differences between 2008 and today

There are worrying similarities between 2008 and today as indicators point to another interbank lending freeze. But there also some important differences: credit bubbles are deflated, housing prices adjusted, private debt reduced and, last but not least, banks have started to deleverage their balance sheets, mainly by strengthening their capital and reserves; even in Europe, banks have increased their capital by more than 20% on average since Lehman.

However, the decisive difference is with regard to the distribution and probability of expected losses, resulting in 2008 mainly from housing loans but today from government debt.

In 2008, losses resulting from the subprime and securitisation debacle were a done deal; there was (and still is) no quick remedy to revive the housing market. But what was unclear was the exposure of each bank to these toxic assets, especially as exposure came not in plain vanilla but in wrapped and structured style. Governments’ task was to make sure that banks could withstand the losses that were bound to hit the banks. Not knowing which banks were most exposed, they offered a wide range of public support to all of them.

Today, the exposure of each bank to government debt is there for all to see, thanks to the last round of the European banking stress tests. But write downs on these assets are far from clear (except in the case of Greek bonds); it depends entirely on the actions of policymakers. It is in their hands to avoid default.

The bottom line: after Lehman, governments around the world did a terrific job in supporting banks, leading to an astonishingly quick recovery of the banking world (also in terms of profits and bonuses). This time around, the ineffective efforts to resolve the euro crisis let the banks down. Now, they have to bear the brunt. But a larger scale banking crisis can still be avoided. All that is required? Decisive action by policymakers to finally curb the sovereign debt crisis.