In a period of uncertainty, it’s time for authorities and regulators to step up. COVID-19 has certainly developed into an unprecedented situation on a global scale — with potentially bigger impacts even than the global financial crisis (GFC) that began in 2008/09.
So, how have central banks responded? We saw during the GFC just how crucial their interventions are to supporting economies — even if there were criticisms from some that they were slow to react.
This time, it seems, they have certainly learned from the past. Actions have been rapid, and on an enormous scale. Commentators like to talk about ‘bazookas’ — they have been used in full force to date.
In China, the People’s Bank of China (PBC) gave a RMB3 trillion injection into the banking system in the first half of February, with a further RMB20 billion at the end of March 2020, along with other financing support measures. In the US, the Federal Reserve (Fed) slashed interest rates by a full percentage point to effectively zero and launched a US$700 billion package of quantitative easing (QE). This was accompanied by a huge fiscal intervention — the US$2.3 trillion Coronavirus Aid, Relief and Economy Security Act (CARES). In Europe, the European Central Bank (ECB) extended its QE program by more than EUR750 billion. The ECB Banking Supervisor has also allowed significant institutions to operate temporarily below the Pillar 2 guidance, the capital conservation buffer, and the liquidity coverage ratio. A delay in the banking stress test scheduled for 2020 and in some supervisory activity, have also been announced to give banks the opportunity to focus on the tasks they need to perform to support the economy during such a difficult context.
In the UK, the Bank of England slashed interest rates by 65 basis points to 0.1 percent, expanded its holding of government bonds by GBP200 billion, and made GBP330 billion of loans and guarantees available to businesses. In Australia, the Central Bank cut rates by 25 basis points twice during March, to 0.25 percent. It established a swap line with the Fed for the provision of US dollar liquidity in amounts up to US$60 billion and established a term funding facility of at least AUS90 billion for SME lending.
Additionally, a deal was agreed between six major central banks including the Fed and the ECB to lower their rates on currency swaps to help financial markets function normally. Central banks, regulators and supervisors have been acting more quickly than ever before to take the necessary measures, overthrowing the limits of the past. They are using all the tools in their armoury to support banks so that they, in turn, can support businesses and families struggling to survive. Monetary policy interventions, delays and waivers on the application of banking regulations, and relaxation on the supervisory expectations on the application of some accounting rules — these are all coming into play.
It is important to underscore that these actions are not intended to help the banks, who were in a much more resilient position in capital and liquidity that they were in 2008, but to improve their capability to fund companies, SMEs and people during COVID-19.
Turning to the ESG theme, as the world begins to emerge from the crisis, the ‘S’ (social) aspect will become more important than ever. This will be the time for social consciousness and awareness to play a key role — supporting societies and communities at both a corporate and individual level. It is a unique opportunity for banks to restore the reputation they lost in the past crisis, showing how crucial they are in a moment like this. By providing the right levers and support mechanisms, central banks can smooth the way to a brighter, cleaner future.