Sustaining Financial Health during the COVID-19 and for the Road to Recovery

November 25, 2020

Hello everyone and thank you for joining us today and thank you to the University of Tokyo and IMF colleagues for the invitation to speak at this important conference.

Today I would like to talk about how the IMF has supported financial sector policymakers across our membership during this COVID-19 pandemic and what the future priorities will be for a healthy recovery.

Stronger starting point, but risks are on the rise

The implementation of the G20 financial regulatory reforms after the 2008 global financial crisis strengthened the financial system. This stronger starting point and swift and bold actions by central banks, fiscal authorities, and financial regulators have been key in containing the economic and financial fallout of the pandemic.

However, risks have been on the rise. We have seen much good news about vaccines during the last couple of weeks but until a medical solution becomes widely available, the strength of the recovery is highly uncertain and the impact on sectors and countries will remain uneven. 

The pandemic could crystallize financial vulnerabilities that have built up over the past decade. Firms and households have taken on more debt to cope with cash shortages, adding to the already high debt levels in several economies. Liquidity pressures may morph into insolvencies if recovery is delayed.

Our October 2020 Global Financial Stability Report analyzed the impact of these pressures on bank solvency in 29 countries. The conclusion is that most banks should be able to absorb losses and maintain capital above minimum requirements under our baseline scenario. This is good news. But there is a weak tail of banks, and some banking systems may experience capital shortfalls in the October 2020 World Economic Outlook adverse scenario. Under this scenario, the capital shortfall could reach 220 billion US dollars even after accounting for bank-specific mitigation policies. 

Away from the banking sector, the pandemic has exposed important vulnerabilities in market functioning and nonbank intermediation. We saw major turbulence in the US Treasuries markets and short-term US dollar funding markets. Corporate debt markets came to a halt, and significant withdrawals placed extreme pressures on the asset management industry. Major central bank intervention was needed to restore calm. 

A potential rise in corporate insolvencies could imply sizeable credit losses and revive amplification spirals between asset prices and redemptions. In the short run, higher credit risk could motivate financial sectors to retreat from credit supply, further exacerbating strains on borrowers. And over the medium term, low interest rates and the belief that central banks will continue to provide support could incentivize investors to take on more risk and increase financial leverage to boost returns. 

The message is that there are still significant risks to the global financial system that will need to be carefully managed to sustain financial health and stability.

Policy responses: what worked and what didn’t?

This year has seen intense activity by financial sector policy makers. 

Preserving nonbank intermediation has required strong policies and massive policy support. Central banks stepped in to calm both domestic and international markets, preventing a freezing of financial markets. But this was simply mitigation and the underlying fragilities remain in place. And indeed central bank action, while necessary, creates adverse incentives. 

Going forward, we need to ensure the resilience of nonbank intermediation as a key priority. Procyclical effects of margin settings by central counterparties should be prudentially mitigated. The liquidity management framework of investment funds should be enhanced, including the use of liquidity buffers and swing pricing. An internationally harmonized measurement of leverage should be further encouraged and developed.

Banks have been tightening their credit standards but overall, they have been able to support the real economy. In most countries, banking regulators, guided by standard setting bodies, have used the flexibility offered by existing rules to encourage the use of buffers and accommodative interpretations of standards. This has helped ensure the continuous supply of credit and avoid excessive procyclicality. [Banking Sector Regulatory and Supervisory Response to Deal with Coronavirus Impact]

That said, policy responses have varied across countries. Partly owing to limited policy buffers and weaker implementation capacity, some countries have relied on measures that are out of line with international standards—such as relaxation of asset classification and provisioning rules. For these countries, it is imperative that measures that weaken transparency and undermine the longer-term resilience of the financial system be phased out as quickly as possible. More generally, authorities should better target support measures (such as payment moratoria), require banks to prudently restructure loans and to collect granular data on borrowers’ evolving credit worthiness. Where necessary, supervisors could allow longer timeframes for banks to restore capital buffers. 

How the IMF strengthened its support for member countries

Policy tradeoffs are getting more and more difficult to manage as the pandemic persists.

Many IMF member jurisdictions have sought specific guidance and advice on the appropriate financial sector policy responses to the pandemic. In response, around 30 COVID‐19 special series notes on financial sector issues have been produced by the IMF to provide guidance and support. We have also worked closely with World Bank staff on a joint staff position note setting out guiding principles and recommendations on regulatory and supervisory policy responses. 

These notes were discussed with national authorities in a series of over 40 webinars attended by authorities from more than 130 countries. The IMF has also intensified bilateral advice on COVID-19 policy responses as part of surveillance, program discussions, and tailored technical assistance (TA).

Sustaining a healthy financial system on the road to recovery

Fundamental uncertainty persists regarding the evolution of the COVID-19 pandemic and the shape of the economic recovery. 

Policy measures may have to evolve further and adjust to changing underlying circumstances, including deteriorating credit quality and changing assessments of real economy funding needs and the path of recovery. The October 2020 GFSR lays out a roadmap for monetary and financial sector policies at different stages of the crisis.

In the near term, policy makers will have to continue considering the trade-offs between supporting credit provision in the short-term and maintaining longer-term resilience. In this context, policy decisions on prudential framework should be informed and driven by the results of stress tests, alongside other information collected by supervisors. It is essential to get a sense of the time profile of potential losses and affected banks and portfolios to determine whether current policies remain appropriate or need to be adjusted. 

When economic recovery eventually takes hold, the policy focus will shift from dealing with liquidity pressure to gradual rebuilding of financial strength. Central bank liquidity support should be gradually withdrawn, and banks should be encouraged to take a prudent approach to recognize credit losses and to rebuild capital over time.

Enhancing financial crisis preparedness

Despite all efforts, pockets of financial instability as a result of the pandemic cannot be ruled out. It is therefore important that authorities prioritize enhancing financial crisis preparedness.

The Global Financial Crisis exposed weaknesses in regimes for dealing with failing systemic financial institutions. While stabilization measures ultimately restored financial stability, the fiscal and economic costs were high. As a result, international regulators developed international standards for effective resolution regimes and deposit insurance systems. These aim to underpin depositor confidence and reduce the risk that government funds need to be deployed to bail-out failing financial institutions, with losses instead borne by private creditors (so called “bail-in). Advanced economies have made significant progress but many developing countries still lack effective deposit insurance and bank resolution regimes

A recent Fund publication Managing Systemic Banking Crises, New Lessons and Lessons Relearned, summarizes how authorities should best prepare for and manage systemic crises. A tenet is that the longer financial problems are allowed to fester, the larger they become. While in most circumstances staff would recommend early quantification of losses followed by prompt intervention, initiating bank resolution during a pandemic may not be practicable. Given the unprecedented nature of the shock and large uncertainty about the recovery, viability assessments may need to wait until the longer-term impact on bank loans can be more reliably estimated. Forcing too rapid a recognition of uncertain losses may constrain banks’ ability to play an important role in absorbing the shock. 


The authorities should be vigilant and ready to address new and growing financial risks until the pandemic is under control and economic recovery is firmly underway. For example, the resilience of nonbank intermediation is already acknowledged as a key area for future policy work. Strengthening the regulatory framework and stepping up prudential supervision to contain excessive risk taking in a lower-for-longer interest-rate environment will be needed.

The IMF will continue to help its membership achieve these goals through our lending lifelines, our ongoing surveillance of emerging risks and vulnerabilities; our extensive capacity development to build stronger national financial systems; and our contribution to the Financial Stability Board and standard-setting discussions. 

With that, I wish you a successful and productive discussion today.

Thank you.
IMF Communications Department


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