The massive macro-financial shock caused by the COVID-19 pandemic precipitated an unprecedented global recession and put the financial sector under pressure. In an effort to mitigate the impact, financial sector authorities around the world have responded by implementing a wide range of supportive measures to keep core markets functioning well and maintain the provision of essential financial services to the market. real economy, including loans and payments. , while preserving the transparency of bank balance sheets and financial stability (eg. Altavilla et al. 2020, FSB 2020).
Monitoring interventions is essential to compare policy responses across countries, assess their effectiveness and potential unintended consequences, and inform policy development going forward. To this end, the World Bank has compiled a publicly accessible database with financial sector policy measures (Alonso Gispert et al. 2020). The database offers three distinctive features. First, it tracks measures in over 150 economies with a focus on emerging markets and developing economies (EMDEs). Second, it categorizes the measures using a simple classification to facilitate analysis. Third, when available, each measurement is accompanied by a date, identification of the issuing authority and a link to the official source of the announcement.
In a recent article (Feyen et al. 2020), we present this database, identify the main patterns of measures taken in the world and take a first step towards analyzing the determinants of the responsiveness and activity of decision-makers. The document illustrates four main types of policy measures.
- The first category (Banking sector) mainly includes measures to facilitate credit flows to the real sector through regulatory reliefs (e.g. encouraging the use of capital and liquidity buffers, flexible treatment of non-performing loans and classification assets) and provide direct support to borrowers (for example, introduce debt repayment moratoriums, facilitating loan restructuring), while ensuring transparency and soundness of bank balance sheets (Drehmann et al., 2020).
- The second category (Liquidity and financing) covers measures to maintain adequate liquidity and funding conditions for financial intermediaries (e.g. direct liquidity injections, reduction of reserve requirements, dollar swap lines between central banks) (Cavallino and De Fiore, 2020 and Way, 2020).
- The third category (Payment systems) encompasses measures to ensure the smooth functioning of payment systems, in particular by facilitating digital payments, an area of particular importance in EMDEs.
- The fourth category (Financial markets and NBFIs) includes all other measures which are primarily aimed at ensuring the proper functioning of financial markets (e.g. circuit breakers, short selling bans, other measures by market regulators) as well as the regulatory support and guidance provided to non-bank financial institutions , including asset managers, insurance companies and pension funds.
Figure 1 Cumulative number of financial sector policy actions related to COVID-19 globally (up to October 30, 2020)
Our database suggests that more than 3,000 policy measures have been taken as of October 30, 2020. We find that all countries covered have issued at least one measure, 95% have implemented at least two and 71% have at least three. . Globally, most measures fall under the Banking sector category (54%), followed by Liquidity and financing (25%). In both categories, almost all countries have taken at least one political action. Conversely, less than 60% of countries have adopted at least one measure in the Payment systems Where Financial markets and NBFIs categories (Figure 1), although there are differences between regions and countries. To compare financial sector policy activity between countries, we calculate the Financial Policy Response Activity Index (FPRAI) – the sum of the number of actions taken by each country in the four categories. Although this index is silent on the quality or impact of policies, it provides a simple and transparent proxy for the level of political activity. For example, the index shows that the number of policies implemented in Africa is significantly lower than in other regions (Figure 2).
Figure 2 Financial policy response activity index, October 30, 2020
The scale and timing of the policy response differed depending on the characteristics of the countries. For example, in Feyen et al. (2020), we show that EMDEs that are economically more developed, more populous, and have higher levels of private debt were generally more likely to implement their first policy measure more quickly during the Banking sector and Liquidity and financing categories. In contrast, budgetary and external factors do not seem to significantly influence the timing of policy makers’ responses. Consistent with these results, the FPRAI is higher in the richest and most populous countries. Empirical results suggest that the spread of COVID-19, macro-financial fundamentals, the size of budget packages, and foreclosure policies have not played a significant role. We also explored the role of characteristics of the banking sector, although the results should be interpreted with more caution given the small sample size. EMDEs with higher bank capitalization and private credit at the level of GDP reacted more quickly in the implementation Banking sector measures. In addition, by controlling for several banking characteristics, EMDEs which have adopted characteristics of the Basel III capital standards and have a higher level of private credit relative to GDP have a significantly lower FPRAI. These findings call for future work to better understand the national determinants of the policy response.
Financial authorities around the world have eased monetary policy and provided liquidity support (as also noted in Gelos et al. 2020), relaxed prudential requirements and supported borrowers and employees. The policy response in advanced economies (EAs) has had a positive spillover effect on EMDEs as it has reduced the need for EMDEs to pursue pro-cyclical domestic policies (Aguilar and Cantú 2020). The types of financial sector measures taken in EAs and EMDEs are broadly similar. However, the degree of budget support is significantly lower in EMDEs (IMF, 2020), and the policy mix of the financial sector is also somewhat different. For example, compared to EAs, EMDEs made less use of measures targeting the banking sector, while they implemented relatively more measures to increase liquidity (in currencies) and facilitate payments, especially digital payments. . In addition, low- and middle-income EMDEs seem to have relied more on the relaxation of certain prudential regulations that go beyond the flexibility enshrined in international standards (for example, lowering minimum capital requirements). risk-adjusted, and particular changes in the treatment of non-performing loans), perhaps because they have fewer options available to them due to limited policy space, bank-centric financial systems and less sophisticated regulatory and supervisory frameworks.
Decisive political action was needed to address financial difficulties in markets and for borrowers, and to support the provision of essential financial services to the real economy. However, for certain temporary measures, the authorities should continue to monitor the relevant trade-offs between keeping such measures in place to support the real sector and maintaining prudent standards of credit risk and liquidity management in order to preserve transparency. bank balance sheets and financial stability. In particular, the negative impact of using regulatory flexibility beyond international standards, however temporary, must be carefully weighed against the short-term benefits. This is particularly important for certain EMDEs which operate in a more constrained environment and have relaxed certain regulatory requirements which may jeopardize the resilience of banks in the medium term. Standardization bodies (eg. CBBC 2020) and the IMF and the World Bank (IMF and World Bank 2020) have made recommendations that can guide decision-makers in this regard. Navigating these compromises in EMDEs is also essential to safeguard the hard-won progress in upgrading their regulatory and supervisory frameworks to align with international standards.
This blog was first published in VoxEU.