Situation: Fragile

Ten years on from the global financial crisis, former Reserve Bank governor Alan Bollard warns that, although lessons were learnt, new risks have emerged that could trigger a repeat contagion.

It hardly seems like 10 years ago. It was September 2008 and the famous Lehman Brothers bank had filed for Chapter 11 bankruptcy protection in the US. Alarm bells had gone off throughout the financial capitals of the world: instability had been brewing for a year but it was now shaking the foundations of the modern international financial system.

Phone lines ran hot: in Washington, New York, London and Frankfurt regulators were desperately using the weekend to try to understand Lehman’s complex and rambling balance sheets. Could any of the operations be saved? Who would foot the bill? If the bank failed, could it bring others down, too?

The timing was awful: the US was caught up in a presidential election, with hopefuls such as the inexperienced Barack Obama making uninformed comments on the economy. The US Government had already rescued another large bank, Bear Stearns, poured funds into Government-sponsored mortgage lenders Fannie Mae and Freddie Mac and refinanced the AIG insurance group. But this time, it decided to let Lehman Brothers go into bankruptcy, triggering the largest such failure ever.

US Treasurer Hank Paulson insisted that all the negotiations be concluded before world markets opened for business on Monday, September 15. By this, he meant the Asian markets – he had forgotten that New Zealand markets opened some hours earlier, the first in the world. As the news came through, our financial markets took a beating.

Over the next week, we watched the news spread around the world, other banks panicking as they tried to assess their exposure to Lehman and to other failing institutions. We watched our newly installed electronic payment systems experience a record number of transactions, and demand for New Zealand cash reached new highs.