## Monetary and Financial Stability During the Coronavirus Outbreak _IMF Blog, March 11, 2020_ ## Source details **Canonical URL:** [Monetary and Financial Stability During the Coronavirus Outbreak](https://www.imf.org/en/blogs/articles/2020/03/11/blog030920-monetary-and-financial-stability-during-the-coronavirus-outbreak) ## Other formats - [Markdown version](/en/blogs/articles/2020/03/11/blog030920-monetary-and-financial-stability-during-the-coronavirus-outbreak/index.md) - [Structured JSON version](/en/blogs/articles/2020/03/11/blog030920-monetary-and-financial-stability-during-the-coronavirus-outbreak/index.json) - [Bundle manifest](/en/blogs/articles/2020/03/11/blog030920-monetary-and-financial-stability-during-the-coronavirus-outbreak/bundle-manifest.json) ## Bibliographic details - Authors: Tobias Adrian - Published: March 11, 2020 --- ### Overview / Context - The global spread of the coronavirus is described as "a human tragedy unfolding across the world." - Quantifying the economic impact is complex, giving rise to significant uncertainty about the economic outlook and associated downside risks. - "Such an abrupt rise in uncertainty can put both economic growth and financial stability at risk." - The blog is part of a special series on the response to the coronavirus. - Author and date: Tobias Adrian — March 11, 2020 ### Higher uncertainty and tighter financial conditions - Measures of economic uncertainty such as equity market volatility "increased sharply in countries around the world." - Stock markets in major economies, such as the United States, the Euro area, and Japan, "all fell sharply and witnessed a surge in implied volatility." - Credit spreads have "widened broadly across markets" as investors reallocate from relatively risky to safer assets. - "High-yield and emerging-market bonds are hit particularly hard." - Spreads of emerging- and frontier-market bonds denominated in U.S. dollars "have widened sharply." - Financial conditions "have tightened significantly in recent weeks," increasing funding costs for companies tapping equity and bond markets. - Resulting economic behavior: firms postpone investment decisions and individuals delay consumption. ### Monetary policy response - Rationale: "The sharp tightening in financial conditions, along with expectations of low inflation, means that monetary policy has a role to play at the current juncture." - Central banks can: - inject liquidity, - cut interest rates, - provide emergency liquidity if liquidity pressures threaten market functioning. - Markets have been anticipating "aggressive easing by central banks," reflected in "the sharp fall in sovereign bond yields in many countries around the world." - Emphasis on coordination: "Synchronized actions across countries increase the power of monetary policy. Therefore, global cooperation to synchronize monetary policy must be high on the agenda." - Cross-border liquidity: "Ample liquidity within countries, and across borders, is the prerequisite to the successful reversal of the rapid tightening in financial conditions." - If conditions deteriorate further, policymakers could revert to tools developed during the financial crisis: - Example: "The Federal Reserve launched the Term Asset-Backed Securities Loan Facility in 2009." - Example: "The Bank of England and U.K. Treasury introduced the Funding for Lending Scheme, where a funding subsidy was provided to incentivize the expansion of lending to households, small and mid-sized enterprises and non-financial corporates." - Other authorities have "deployed variants of such lending schemes that aim at lowering the costs of borrowing in certain sectors." ### Financial stability policies - Market signals: banks’ share prices "have fallen sharply," and banks' bond prices "have also come under some pressure." - Balance-sheet resilience: "Banks are generally more resilient than before the 2008 financial crisis, because they have greater capital and liquidity cushions." - Supervisory guidance: - "Supervisory authorities should... monitor developments at banks very closely." - Banks could consider "a temporary restructuring of loan terms for the most-affected borrowers," given the temporary nature of the outbreak. - Supervisors should work closely with banks to ensure such actions are "both transparent and temporary." - The goal: "to preserve banks’ financial strength and overall transparency across the financial sector." - Nonbank risks: - Authorities should be "alert to possible financial stability threats from outside the banking system." - Increased focus on asset managers and exchange-traded funds, where investors might "liquidate risky investments suddenly." - Market functioning and funding strains: - "Anecdotal evidence suggests that liquidity has been tightening in many markets." - There are "strains in U.S. dollar funding markets, where non-U.S. banks and corporates borrow in U.S. dollars." - "Large swings in asset prices can quickly put markets and institutions under pressure." ### Key policy recommendations and actions - Act decisively and cooperate at the global level to preserve monetary and financial stability. - Prioritize global cooperation to synchronize monetary policy. - Ensure ample liquidity domestically and across borders; provide emergency liquidity if needed. - Consider targeted lending schemes or funding facilities to lower borrowing costs in affected sectors, drawing on tools used in 2009 and other post-2008 innovations. - Monitor banks closely and facilitate transparent, temporary loan-term restructuring for most-affected borrowers to preserve bank strength and transparency. - Monitor nonbank sectors, including asset managers and exchange-traded funds, for abrupt liquidations and liquidity tightening. - The IMF will act as needed to help its members face this extraordinary, but hopefully temporary, crisis. *Tobias Adrian — March 11, 2020* --- ## References - [targeted economic policies](https://blogs.imf.org/2020/03/09/limiting-the-economic-fallout-of-the-coronavirus-with-large-targeted-policies/) - [fiscal measures](https://blogs.imf.org/2020/03/05/fiscal-policies-to-protect-people-during-the-coronavirus-outbreak/) - [https://www.imf.org/wp-content/uploads/2020/03/chart-1.png](https://www.imf.org/wp-content/uploads/2020/03/chart-1.png) - [https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-2-new-1.jpg](https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-2-new-1.jpg) - [https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-3-new.jpg](https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-3-new.jpg) - [https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-4-new.jpg](https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-4-new.jpg) - [https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-5-new.jpg](https://www.imf.org/wp-content/uploads/2020/03/eng-mar-10-mcm-5-new.jpg) - [preparing](https://blogs.imf.org/2020/03/04/potential-impact-of-the-coronavirus-epidemic-what-we-know-and-what-we-can-do/) _Source: https://www.imf.org/en/blogs/articles/2020/03/11/blog030920-monetary-and-financial-stability-during-the-coronavirus-outbreak_