Are Financial regulators across the globe adequately responding to the economic and operational impacts of COVID

Financial regulators across the globe have issued statements announcing precautionary measures to address the economic impact of the coronavirus (COVID-19), signalling a growing willingness to intervene.

The Bank of Japan (BoJ), European Central Bank (ECB), UK’s Financial Conduct Authority (FCA) and the US Federal Reserve have all announced a range of measures that target the economic and operational risks the virus poses.

“The coronavirus outbreak is a fast-developing situation, which creates risks for the economic outlook and the functioning of financial markets,” says Christina Lagarde, president of the ECB facing her first major test since she took over as ECB president in November.

“The ECB is closely monitoring developments and their implications for the economy, medium-term inflation and the transmission of our monetary policy,” she adds. “We stand ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.

Although markets predict that the statement makes it unlikely for the ECB to cut interest rates from their low level of -0.5%, Lagarde’s announcement indicates that it might consider other ways to inject money into the economy.

The BoJ has signalled that it will provide more liquidity into the markets and hinted at greater asset purchases in an emergency statement on COVID-19.

Haruhiko Kuroda, governor of the central bank, says:

The Bank of Japan will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”

The FCA notes that it is working closely with the financial services sector to ensure it is responding effectively to the COVID-19 outbreak. This is in conjunction with the Bank of England and HM Treasury.

“We expect all firms to have contingency plans in place to deal with major events. Alongside the Bank, we are actively reviewing the contingency plans of a wide range of firms. This includes assessments of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to serve and support their customers.”

The regulator expects firms to take all reasonable steps to meet their regulatory obligations.

“For example, we would expect firms to be able to enter orders and transactions promptly into the relevant systems, use recorded lines when trading and give staff access to the compliance support they need. If firms are able to meet these standards and undertake these activities from backup sites or with staff working from home, we have no objection to this.”

The US central bank reacted by slashing interest rates in response to mounting concerns about the economic impact of COVID-19.

The Federal Reserve lowered its benchmark rate by 50 basis points to a range of 1% to 1.25%.

The regulator’s chair, Jerome Powell, said the US economy remains strong but it is difficult to predict the “magnitude and persistence” of the effects of the spreading virus.

“We don’t think we have all the answers. But we do believe that our action will provide a meaningful boost to the economy. The virus and the measures that are being taken to contain it will surely weigh on economic activity for some time, both here and abroad,” Powell said at a press conference in Washington.

On its part, the Central Bank of Nigeria (CBN) recently announced its initial policy response to the pandemic. Below are highlights of the bank’s communique:

• All CBN intervention facilities are hereby granted a further moratorium of one year on all principal repayments effective March 1, 2020.
• Interest rates on all applicable CBN intervention facilities are hereby reduced from 9.0% to 5.0% for 1 year effective March 1, 2020.
• The CBN establishes a N50 billion targeted credit facility through the NIRSAL microfinance bank for households and SMEs vulnerable to the COVID-19 pandemic.
• The CBN hereby opens intervention facilities and loans to pharmaceutical companies intending to expand operations and set up drug manufacturing plants.
• The CBN hereby grants Deposit Money Banks leave to consider temporary and time-limited restructuring of the tenor and loan terms for businesses and households most affected by the outbreak of COVID-19.
• Strengthening of the CBN’s LDR policy to support credit growth. The CBN would further support industry funding levels to maintain DMB’s capacity to direct credit to individuals, households and businesses.

It’s however, generally believed that the policies will be beneficial to corporates who currently enjoy CBN intervention loans. With an extra 1-year moratorium and lower interest rate (from 9.0% to 5.0%), these companies would enjoy improved liquidity. In addition, the CBN’s regulatory forbearance on loan restructuring would further support credit quality and prevent a credit crunch in the event of a protracted low oil price environment.