Taking stock of the financial sector policy response to COVID-19 around the world

The COVID-19 pandemic caused a massive financial shock, triggering an unprecedented global recession. This has put pressure on the financial sector. To reduce the impact of the COVID-19 pandemic, the financial sector authorities have implemented a broad range of support measures to maintain the functioning of the core markets and continue to provide critical financial services for the real economy. This includes lending and payments. Altavilla et al. (FSB 2020, 2020, 2020).

It is essential to track interventions to benchmark policies across countries, evaluate the effectiveness and unintended effects, and inform future policy decisions. The World Bank created a database of financial sector policies (Alonso Gispert and others) that is publicly accessible. 2020). The database has three distinct features. It tracks measures in more than 150 economies, focusing on emerging and developing markets. It categorizes actions in a way that facilitates analysis. Third, if available, each measure comes with a date and the identification of issuing authority.

In a recent paper (Feyen et al. In 2020, we present this database, identify the broad patterns of actions taken in different parts of the world, and first attempt to analyze the factors determining policymakers’ responsiveness. This paper illustrates the four types of policy measures.

  • The first category (Banking Sector ) is mainly composed of measures that facilitate the flow of credit into the real sector by reducing regulatory burdens (e.g., Encouraging capital buffers and liquidity, flexible treatment of nonperforming loans and asset classification) and providing direct support to borrowers. Introduce debt repayment moratoria and facilitate loan restructuring while ensuring transparency and soundness of bank balance sheets ( Drehmann et al., 2020).
  • Liquidity is the second category. It includes measures to ensure that financial intermediaries have adequate liquidity. Direct liquidity injections (lower reserve requirements, US Dollar swap lines between central bankers) (Cavallino & De Fiore 2020Lane 2020).
  • The third category ( Pay-System ) includes measures to safeguard the smooth operation of payment systems, including facilitating electronic payments. This area is of particular importance to EMDEs.
  • The fourth category (Financial markets and NBFIs) includes all the other measures that are primarily focused on ensuring the proper functioning of the financial markets (e.g., Circuit breakers, short-selling bans, and other market regulator measures are included in the fourth category (em>Financial Markets and NBFIs/em>).

Our database shows over 3,000 policies have been implemented as of 30 Oct 2020. All countries have implemented at least one policy measure. 95% have also implemented at least two steps, while 71% have implemented at least three. Most actions globally fall under the Banking Sector category (54%) and then Liquidity & Funding (25%). In both types, nearly all countries have implemented at least one measure.

In contrast, less than 60% of countries adopted at least one policy in the Financial Markets and NBFIs category (Figure 1). However, there are differences between regions and countries. We calculate the Financial Policy Response Activity Index to compare the financial sector policies across countries. This is the sum of each country’s measures across the four categories. This index does not reflect the impact or quality of policies, but it is a transparent and straightforward proxy for the activity level. The index, for example, shows that in Africa, the number of procedures is lower than in other regions.

The response has been different in scale and timing depending on the country’s characteristics, for example, in Feyen et al. In (2020), our results show that EMDEs with higher levels of private debt, more significant economic development, and larger populations are typically more likely than others to implement their first measure in the Banking sector or Liquidity & Funding category. Fiscal and external factors, on the other hand, do not have a significant impact on policymakers’ response timing. In line with these findings, the FPRAI score is higher in more prosperous, populous countries. The empirical results suggest that macro-financial basics, the size and spread of fiscal packages, and lockdown policies did not significantly impact the FPRAI. The results of our study should be interpreted more carefully due to the small sample size. EMDEs with higher bank capitalization levels, private credit, and GDP responded more quickly to the Banking sector. EMDEs with higher personal credit levels and Basel III capital standards, as well as those that have adopted the Basel III standards, show a lower FPRAI when controlling for other banking characteristics. These findings suggest that future research is needed to understand country determinants of policy responses better.

Globally, financial authorities have eased monetary policy to provide liquidity support. (As also noted by Gelos and al. 2020), eased prudential standards and supported employees and borrowers. The response of advanced economies (AEs), which reduced the need to pursue procyclical policies in EMDEs, has positive spillovers. (Aguilar & Cantu 2010). Financial sector policies in AEs & EMDEs have a similar approach. The fiscal support in EMDEs is significantly lower ( IMF 2020), and the mix of financial sector policies differs. Compared to AEs, for example, EMDEs used fewer measures targeting the financial sector. They implemented more measures to facilitate payments and increase foreign currency liquidity. Low- and middle-income EMDEs have relied heavily on the relaxation of specific prudential regulation that goes beyond the level of flexibility embedded in international standards. Two examples are lowering minimum risk-adjusted requirements and changing the treatment of nonperforming loans. These countries have fewer options due to their limited policy space, banking-centric financial systems, and less sophisticated regulatory and supervision frameworks.

Decisive policy actions were needed to address the financial distress in the markets and among borrowers and to provide critical financial services for the real economy. Nevertheless, the authorities should continue monitoring any relevant trade-offs regarding temporary measures. They must balance keeping these measures to support the real sector with maintaining prudent credit risk management and liquidity standards to preserve the transparency of bank balance sheets and financial stability. The short-term and long-term effects of regulatory flexibility beyond international standards should be carefully considered. It is essential for some EMDEs that operate in an environment with more restrictions and have relaxed some regulatory requirements, which may affect bank resilience in the medium term. Standard-setting bodies (e.g., BCBS2020), the IMF, and the World Bank ( IMF & World Bank 2020) have all issued recommendations to guide policymakers. It is essential to navigate these trade-offs regarding EMDEs, to preserve the hard-won progress to upgrade their regulatory and supervisory frameworks to align them to international standards.

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