Trying to stop financial crises before they happen is not enough on its own, according to new research from the University of Surrey. The study shows that when governments and central banks only focus on preventing crises and neglect how they will respond after one hits, they risk making the economic damage worse.

Financial crises are often managed in two stages: policymakers try to prevent excessive borrowing during good economic times and then provide support when markets collapse. However, policymakers often treat these as separate tasks. Surrey’s research finds that the two must work together. If a country raises borrowing controls in good times without having a clear support mechanism for bad times, the economy can suffer deeper crashes.

The study, published in the National Bureau of Economic Research,simulated different policy approaches: one where governments only restrict borrowing, one where they only support markets during a crisis, and one where both are used together. They found that using both tools delivers clear benefits for economic stability, while using just one can reduce national welfare.

Dr Aliaksandr Zaretski, co-author of the study and Lecturer in Economics at the University of Surrey said:

“Our work shows that crisis prevention and crisis response are two sides of the same coin. If you only tighten regulations in good times without preparing to intervene in a crash, you risk triggering deeper downturns. Equally, waiting until a crisis hits and responding only then is too late. The most effective approach is to design both strategies together, so that economies are better protected and recover faster.”

The study also finds that during a typical crisis, the financial support needed afterwards is far larger than the earlier regulatory measures. In the model, the support provided during a crash is more than four times larger than the tax used to restrict borrowing during good times. This highlights the scale of crisis management needed to stabilise markets.

The findings suggest that central banks and finance ministries should coordinate preventive regulation and crisis support rather than treating them as distinct responsibilities. The research also indicates that in some cases, a well-designed crisis response policy alone can achieve the best outcome where borrowing constraints are particularly severe.

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