## Online Boxes 3.1–3.2: Liquidity Strains Cushioned By A Powerful Set Of Policies

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**Canonical URL:** [Online Boxes 3.1–3.2: Liquidity Strains Cushioned By A Powerful Set Of Policies](https://www.imf.org/-/media/files/publications/gfsr/2020/october/english/onlinebox31.pdf)

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### Online Box 3.1 — Group of Seven Policy Measures that Supported Corporate Funding during the Containment Phase of the COVID-19 Pandemic
- Scope and timing
  - Covered G7 economies: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
  - Timeline considered: February through June 2020; number of interventions “skyrocketed in March.”
- Nature and intensity of policy action
  - Panel 1 of Online Box Figure 3.1.1 shows the number of key policy announcements and policy announcement days from February–June 2020; policymakers often announced multiple measures on a single day, so total number of measures greatly exceeds number of days with announcements.
  - Early central bank action focused on market liquidity and policy rate cuts.
  - Early government action included provision of loans and guarantees to businesses and measures to directly support corporate cash flows.
- Specific central bank and government measures
  - The Federal Reserve reactivated programs implemented during the global financial crisis, such as the Term Asset-Backed Securities Loan Facility and the Commercial Paper Funding Facility.
  - G7 central banks significantly expanded asset purchase programs, including announcement of purchase of corporate bonds in the primary and secondary markets.
  - Central banks created facilities to stimulate lending to nonfinancial firms, effectively stepping in as buyers of last resort to contain upward pressure on the cost of credit.
  - To support bank lending, supervisors most commonly released countercyclical capital buffers and introduced restrictions on payouts to shareholders.
- Targeting and support for small and medium enterprises
  - Governments implemented various programs to facilitate access to credit for small and medium enterprises.
  - According to the Yale Program on Financial Stability, G7 economies committed more than $2.7 trillion in funding for credit support programs for those enterprises, with a total utilization rate of nearly 50 percent as of the end of July.
- Contrast with the 2007–09 global financial crisis
  - During 2007–09 central banks supported selected markets and intermediaries when the financial system was impaired.
  - In the COVID-19 crisis, central banks intervened more directly to ensure firms’ ability to obtain funding and to promote stability in sectors most exposed to the pandemic.

### Online Box 3.2 — Corporate Debt Financing Choice and Firm Characteristics
- Objective and methodology
  - Investigates firms’ choice of debt financing instrument (bond versus loan) and whether firm characteristics affected that choice differently during the COVID-19 crisis and the global financial crisis (GFC).
  - Empirical approach: logit analysis following Adrian, Colla, and Shin (2013).
  - Sample: US nonfinancial firms that issued at least one corporate bond or took out one syndicated loan between the first quarter of 2000 and the second quarter of 2020.
- Variable definitions (as used in the analysis)
  - Rating: scaled indicator that ranges from 1 (default) to 22 (AAA).
  - Leverage: total debt (the sum of current liabilities and long-term debt) divided by assets.
  - Tobin’s Q: the market value of equity plus the book value of total debt divided by the book value of assets.
  - Profitability: the ratio of operating income before depreciation to total assets.
  - All characteristics are lagged by one quarter.
- Key findings
  - The likelihood of obtaining funding from the bond market increases with leverage and investment opportunities (measured by Tobin’s Q) during both crisis and non-crisis times.
  - The relationship of bond issuance probability with leverage and Tobin’s Q became stronger during the containment phase of the COVID-19 crisis (2020:Q1–2020:Q2), suggesting the US bond market became relatively more attractive for firms with high leverage and better investment opportunities.
  - By contrast, firm rating and profitability do not seem to play a role in the choice between bond and loan issuance.
- Statistical note and periods
  - Non-crisis period defined as the full sample excluding the GFC (2007:Q2–2009:Q2) and COVID-19 periods (2020:Q1–2020:Q2).
  - Online Box Figure 3.2.1 displays changes in probability (percentage points) of issuing a bond versus a loan associated with a one standard deviation increase in each firm characteristic; significance indicated at the 10 percent level.

*International Monetary Fund | October 2020.*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2020/october/english/onlinebox31.pdf_