How Monetary Authorities Responded to the COVID-19 Pandemic

In addition to being a health crisis, COVID-19 triggered the most significant economic peril since the financial crisis of 2008. Fortunately, the global financial system was in a position to withstand the pandemic due to regulatory measures that were put in place after the 2008 crisis. Prompt decisive actions were taken by monetary authorities and financial institutions in response to the pandemic, and large banks within the G20 reaped the benefits from pre-COVID capital, liquidity and leverage requirements.

The shock-mitigating measures taken by central banks, including regulatory forbearance, were instrumental to maintaining financial stability. These actions complemented the fiscal response, which resulted in substantial expansions in fiscal deficits and debt during the pandemic as governments sought to ease the economic strain on households and businesses.

Given the anticipation of a liquidity crunch, the monetary authorities in most of the G20 economies cut their policy rates, whether it be the discount rate or the repo rate, in the wake of the pandemic. Besides the use of policy rates, many central banks in the G20 enhanced their liquidity support to banks and other deposit-taking institutions (DTIs).

Some G20 central banks, particularly in Latin America, lowered the regulatory requirements for deposit reserves, while about 40 percent of the monetary authorities in the G20 lowered the capital requirement ratios for banks in their jurisdictions, largely through the release of countercyclical capital buffers. A countercyclical capital buffer (CCyB) is intended to protect the banking sector against losses that could be caused by an increase in cyclical systemic risks. When the regulator perceives that financial-system risk is rising at an alarming rate, it can increase the countercyclical capital buffer. After a shock or the dissipation of risks, the regulator can reduce the countercyclical capital buffer to support the supply of credit to the real economy.

Authorities in France, Germany and the United Kingdom (UK) reduced their countercyclical capital buffer in response to the COVID-19 shock. On the other hand, to conserve capital at the height of the pandemic, central banks in Australia, India, Turkey and the UK placed restrictions on dividend payments by banks, while authorities in the European Union and Mexico advised against making dividend payments, but did not formally enforce this guidance.

The actions taken by the monetary authorities across CARICOM were quite varied. The central banks in Belize, Guyana, Haiti, Jamaica, Suriname, and Trinidad & Tobago, lowered their cash reserve requirements for banks and other licensees, whereas Barbados reduced the Government securities requirement for banks and totally eliminated the securities requirement for deposit-taking finance and trust companies. The central banks of Barbados, the Eastern Caribbean, and Trinidad & Tobago all lowered their discount rates on overnight lending to reduce the cost of liquidity to commercial banks and other licensees. The Central Bank of Barbados also indicated its readiness to make collateralised loans to its licensees for up to six months.

In Jamaica, besides the reduction of cash reserve requirements, the Bank of Jamaica (BOJ) strived to ensure system-wide liquidity by removing limits on the amounts that deposit taking institutions can borrow overnight without being penalised, broadening the range of acceptable repo collateral, and instituting a bond-buying programme for Government of Jamaica and BOJ securities.

For the purpose of conserving international reserves, the Central Bank of The Bahamas suspended the approval of foreign exchange outflows for portfolio investment via the Investment Currency Market (ICM) and the Bahamas Depository Receipt (BDR) programme. It also requested the National Insurance Board (NIB) to repatriate some of its assets which were invested abroad.

The BOJ also tightened exchange controls through the containment of foreign reserve sales via the BOJ Foreign Exchange Intervention & Trading Tool (B-FXITT). Following the advice of the authorities, deposit taking institutions and financial holding companies in Jamaica suspended their payment of dividends in an effort to maintain healthy capital levels.

Temporary regulatory forbearance varied across the region. Moratoria on loan payments represent the most widely used relief facility by banks and other lenders, and central banks exercised forbearance by allowing licensees to not classify loans that were under moratoria as non-performing. In Belize, the central bank reduced the risk weight for loans to the tourism sector from 100 percent to 50 percent.

To fight the virus and its economic effects, including heightened borrowing requirements, the Eastern Caribbean Central Bank (ECCB) altered its credit allocation budget, thereby increasing its lending capacity to member governments.

The measures taken by the monetary authorities in large and small states reflect the magnitude of the shock on economies and financial systems. Policy responses in individual countries reflect the institutional framework and the buffers available to cope with the crisis. The measures are intended to safeguard financial stability, and highlight the importance of maintaining appropriate buffers. Indeed, the negative spill-overs from services, manufacturing and other productive industries to the financial sector, would have been much more severe if financial entities had not built liquidity and capital buffers over time.

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1Comprising 19 countries and the European Union, the G20 is a forum for economic cooperation. It works to address global issues such as financial stability, climate change mitigation and sustainable development.