Could the inflationary crisis develop into a financial crisis similar to the 2008 crisis? The chief economist of Capital Economics, Neil Shearing, does not rule out such a possibility and identifies the greatest risks for countries such as Great Britain, Canada, Australia and New Zealand, as well as in the shadow banking sector, Money Review quotes.

As Capital Economics analysis shows, it is important to distinguish between a liquidity crisis and a solvency crisis.

According to the investment firm, central banks have the necessary tools to deal with liquidity crises that can arise as a result of rising interest rates and falling asset prices.

Instead, economists worry about a bigger threat, where higher interest rates could cause a large and simultaneous decline in assets, which in turn would threaten the solvency of financial institutions.

According to Shearing, most banks today are better prepared to deal with falling asset prices than they were in 2007. Capital requirements have increased and stress tests are stronger.

Thus, according to Capital Economics, if problems arise, they will be in small banks and in the so-called shadow banking sector, that is, a part of the market that is not so closely monitored by supervisory authorities.

The second point of risk is in economies where interest rates are rising particularly sharply. Britain stands out among these countries, notes Shearing.

Capital Economics also includes countries that have experienced significant house price growth, namely the United Kingdom, Canada, Australia and New Zealand, in the “at risk” category.

The third source of risk is identified in foreign exchange markets. A strong dollar can cause problems for companies that have borrowed in dollars but do not have a dollar revenue stream or sufficient compensation for that risk. This, in turn, could cause losses for the banks that lent to these companies.

In any case, Capital Economics notes, history shows that each crisis can cause very different damage to the economy. A key factor in determining the extent of the damage is whether these problems will “contaminate” the wider financial system, hampering lending.

It depends on how healthy banks, households and companies are. Although clouds are gathering over the global economy and financial system, Capital Economics points out that borrowing by banks and households is significantly lower than in 2007 in large and advanced economies. (joyful)

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