Lessons learned from global financial crisis are a model for post-pandemic reforms

by David Longworth, Frank Milne. Originally published on Policy Options
May 17, 2021

Early in the COVID-19 pandemic, it became evident that public health authorities and governments in Canada were not well-prepared. The lack of preparation included dealing with the spread of the disease itself and broader health issues. But it also encompassed government policy issues related to providing income and loan supports, as well as implementing various types of lockdown restrictions.

There are many parallels between this lack of preparation and the unpreparedness of financial regulators prior to the global financial crisis (GFC) of 2008-09. Thus, there are many lessons to be learned from the changes made after that crisis. These include the nature of post-mortem reviews and the importance of revising plans based on the analysis of what is uncovered. They also include the need to use stress tests and exercises on a regular basis. These techniques recognize there is an overall health-social-economic system that is affected by a vast array of policies and decisions made by public health authorities and governments. We recommend that these techniques be required by federal and provincial law and that their results be taken seriously to update plans for future pandemics.

There are at least 10 significant parallels between the lack of preparation prior to the pandemic and the experience of financial regulators before the financial crisis. The first two parallels are insufficient stress testing and the absence of exercises that take a system-wide approach that includes effects on the real economy and that takes into account the interconnection of stresses. Other parallels include failing to have: sufficient stocks of equipment, supplies, space and staff (or, in the financial crisis, of equity capital and liquidity); a clear understanding on how much of such resources can be borrowed and in what circumstances; data collected on a consistent manner across health units and provinces (banks or countries); clear early warning systems; plans for dealing with contagion from abroad; a clear understanding of operational risks; an understanding that individuals are diverse and this heterogeneity needs to be taken into account in modeling; and an understanding that planners need to take into account behaviour outside the highly regulated health (or banking) system, such as in long-term care homes (and shadow banks).

Given the serious post-mortems and financial sector reforms following the GFC to deal with those areas listed above and more, we propose that the federal and provincial ministers of health and finance mandate a similar reform process for planning for future pandemics. In Canada and other countries, past epidemics were followed by forensic reports on the successes and failures in health responses. These reports focused on health considerations. Tragically, in too many cases, the recommendations were not implemented and the reports were ignored. This COVID pandemic has been far more severe for the health sector than other pandemics in recent history. In addition, government responses, such as lockdowns, have had major consequences for society, education, the economy, the financial sector and government debt.

Some early post-mortems are beginning to appear. For example, the federal auditor general has issued an early report on government responses and their shortcomings. She recommended that the Public Health Agency of Canada improve its information technology infrastructure, better promote timely risk assessments, and improve systems for nationwide mandatory quarantines. As well, the Ontario auditor general and the Ontario’s Long-Term Care COVID-19 Commission have issued reports on the pandemic preparation and response in that province’s long-term care sector.

This is a good start, but it is limited to a subset of health system responses. As well, it does not address the implications of government policies impacting other aspects of society and the economy. More- thorough post-mortems require careful analysis of government policy responses, their successes and failures. The failures require serious attention and we must explore both the lack of preparation going into the pandemic and policy failures during the pandemic. It is critical that lessons learned are incorporated into recommendations for dealing with future pandemics. These recommendations need to be based on evaluations of alternative policy options for future pandemics. They then need to be incorporated into formal plans and implemented.

The plans also need to be regularly tested. Stress tests and exercises have been found to be extremely useful ways of testing plans in many different areas. These include the military, the financial sector, corporate strategy and public health. They are used to discover areas where preparedness is currently insufficient. A stress test examines the effect of a large negative event on a health, social and/or economic system to test its resilience. This technique has been used extensively by private banks and banking regulators to test the solvency of banks and banking systems.

In the pandemic-preparation area, a stress test could consist of having an external party create a scenario fundamentally different from what has happened in the recent past. This could include an assumed new disease, spread in a particular way, affecting certain age groups, with a particular degree of transmissibility. The stress test should include the social, economic and additional health consequences of government policies (e.g. the consequences of a lockdown over a specific period of time.) The entire stress test should be revealed at once and officials should take sufficient time to work through all the implications in some detail. Weaknesses of current plans should be noted and recommendations to improve them should be made. Follow-up of those recommendations is essential.

An extension of the stress test idea is an exercise (sometimes called a wargame). This technique extends the idea of a stress test to a real-time simulation of a crisis, such as a pandemic, with the participation of senior officials from the Public Health Agency of Canada, the departments of health and finance, as well as the Bank of Canada. The exercise should explore the accuracy and timeliness of information systems and the effectiveness of decision-making procedures. (In the current pandemic, information and other systems in many jurisdictions have been found wanting.) Generally, it should be carried out over a short period of time such as a day or a weekend. New information about the pandemic would be revealed by the organizers at various points of time during the period. Such exercises, in various degrees of sophistication, are being used in the financial system. Pandemic exercises have been run, but as far as we can observe, these have been limited to particular aspects of the health system. They have not incorporated the wider implications for broader public health issues (mental health, delay of surgery) and government actions related to the details of lockdowns, as well as fiscal and monetary policies. Furthermore, there has been a very disturbing lack of implementation of recommendations from previous limited health exercises.

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We call on federal and provincial ministers of health and finance to mandate annual stress tests and exercises that incorporate these wider aspects of a pandemic. The results of these tests and exercises should be published, along with the recommendations that flow from them. Furthermore, we call on federal and provincial governments to legislate this mandate. The recommendations of these exercises should be taken seriously, with subsequent audits by auditors general checking that the recommendations have been implemented.

This article first appeared on Policy Options and is republished here under a Creative Commons license.