COVID-19 and the new financial system

COVID-19 and the financial system — How resilient are the banks? How are they supporting the economy?:

The COVID-19 pandemic and the closure of the economy have had a significant impact on financial markets and banks. Banks need to play a key role in channeling credit (including government) to businesses and households, both to alleviate the pain of the recession and to accelerate the return to a more normal economy as the pandemic subsides.

To support banks’ prosperity, regulators have encouraged them to use their capital and liquidity buffers and ease certain capital requirements. Do the banks live up to expectations? Are banks strong enough to hold back loans during the economic downturn, or do they have to reduce dividends or buy back shares, for example?

 What do we learn from the behavior of banks in the credit and bond markets about the costs and benefits of Dodd-Frank and other reforms implemented after the Great Recession of 2007-2009? What vulnerabilities have been exposed? Are there long-term risks to financial stability if regulatory tolerances are extended?

Brookings’ Hutchins Center discussed these issues in a webinar on June 4th. Former Federal Reserve Governor Jeremy Stein, along with co-authors Samuel Hanson, AdiSunderam, and Michael Blank, who currently works at Harvard University, presented a background document. Former Fed Governor and banker Betsy Duke, Andrew Metrick and Don Kohn of Yale, and Nellie Liang of Brookings took part in the talks.

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It is a pleasure to virtually take part in the fourth seminar on the local funding mechanism today. And the Covid-19 scenario in the financial sector may no longer be relevant.

2020 goes down in history as one of the worst health crises of the last century and global economic contraction.

The rapid response of governments, central banks, and regulators to mitigate the immediate impact on the real economy has stabilized the catastrophic situation for world markets.

 With mass vaccination, the focus of the policy has shifted from providing liquidity and stabilization to treating the long-term scars of the crisis: the allocation of capital and labor in potential sectors and permanent production losses. To enable this redistribution and to address the long-term challenges for sustainability, we need a financial system that is fit for purpose. Can Covid-19 give us the opportunity to strengthen it?

In my comments today I will say that we must first learn from the crisis and I will concentrate on two dimensions.

First, there are familiar challenges. Post-financial crisis (CCR) reforms removed the risk from the banking system as non-bank financial intermediaries (NBFI) began to fill the gaps. We knew this before Covid-19 and the crisis confirmed it. What do you say about the resilience of this new system?

Secondly, there are unknown challenges. The crisis has accelerated the digitalization of our economies and accelerated changes in the way businesses and individuals work, save and spend. How can technology support the digitalization of the financial sector for Covid-19 and help regulators make the sector safe and sustainable?

The COVID-19 pandemic caused a rapid transformation in the global financial system: companies, large and small, needed almost immediate liquidity, individuals accepted digital and contactless offers at unprecedented rates, and governments wanted to distribute large aid packages between businesses and individuals. In this publication, members of the Global Future Council on Financial and Monetary Systems highlight how the financial system quickly adapted to the COVID-19 crisis, supported its diverse stakeholders, and was transformed accordingly. The authors also give their predictions on how the system may emerge from the crisis.

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