Financial markets throughout the world are in turmoil with the shutdown of business activity precipitated by the Coronavirus crisis. Ordinarily, a critical global situation such as this would inevitably lead to a severe economic downturn.
In this case however, we are forced to confront another harsh truth; reality of global monetary policy over the last decade.
Since what has come to be known as the "Global Financial Crisis" (GFC) of 2008, central banks throughout the world such as the Federal Reserve, the European Central Bank (ECB) and the Bank of England employed ever-increasing Quantitative Easing (QE) programs in order to secure the economy against immediate threats.
These QE programs resulted in an increase in the overall money supply, a drastic reduction in interest rates and insulated financial institutions from the fallout they would otherwise face as a result of being over-leveraged.
On the surface, the global economy seemed to recover as business activity recovered, stimulated by increased access to cheap money.
However, at a monetary policy level, the central banks, by reducing interest rates to near zero, had effectively disarmed themselves of the tools they would need in order to weather future economic storms.
In addition to that, the problems created by over-leveraged financial institutions that led to the 2008 GFC not only remained unsolved, but were exacerbated.
The underlying problem therefore grew considerably, awaiting a trigger to manifest its fallout.
COVID-19 is that trigger.
COVID-19, also known as Coronavirus, is an infectious disease caused by a new type of corona virus originating in animals. The disease causes respiratory illness (like the flu) with symptoms such as a cough, fever, and in more severe cases, difficulty breathing.
At present, the world is still reeling from the direct effects of the last economic crisis. The real economy and has not yet come to terms with the economic storm that will be unleashed hereafter.
There is however, a silver lining.
Following the collapse of Lehman Bros in 2008, the G20 initiated a global ISO standard that increased transparency in global financial markets; the Legal Entity Identifier (LEI).
This identifier serves as a passport number for companies operating internationally, identifying the exact legal entity and its ownership structure, thus avoiding the confusion that reigned in 2008 when financial institutions had difficulty ascertaining their counterparty exposure in a time of economic volatility.
Regulators throughout the world have recognised the utility of the LEI as the pre-eminent identifier and a multitude of regulatory reporting mechanisms throughout the world now require an LEI. Indeed under MiFID II, the EU mandate has been described as "No LEI, No Trade".
Today, LEIs are also being matched with International Securities Identification Numbers (ISINs), rendering increased transparency for market participants by identifying the financial instruments issued by individual companies.
The world is currently facing unprecedented challenges. While peoples' health must be at the forefront of these, the financial well-being of the global system remains a critical priority.
At this time, the real utility of the LEI in delivering transparency to opaque markets will undoubtedly come to the fore.
Order your LEI now or contact us today to find out more.