## Handle with Care: Regulatory Easing in Times of COVID-19

_IMF Working Papers, February 26, 2021_

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## Bibliographic details
- Authors: Fabian Valencia, Richard Varghese, Weijia Yao, Juan Yepez
- Published: February 26, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513570631.001

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### Overview
- Title: Handle with Care: Regulatory Easing in Times of COVID-19
- Authors: Fabian Valencia, Richard Varghese, Weijia Yao, Juan Yepez
- Date: February 26, 2021
- Core objective: Examine how stock prices reacted to regulatory easing announcements during the COVID-19 shock to assess effects on financial conditions and the flow of credit.

### Methodology
- Empirical approach: Intraday event study.
- Sample: 18 advanced economies and 8 emerging markets.
- Key variable of interest: Stock prices as a driver of financial conditions.
- Focus: Regulatory easing announcements across jurisdictions and across regulatory tools (capital regulation, liquidity regulation), and comparison with non-regulatory financial measures.

### Key Findings
- Overall effect:
  - Regulatory easing announcements contributed to looser financial conditions.
  - Effects varied across sectors and tools.
- Sectoral effects:
  - Financial regulatory easing led to lower valuations for financial sector stocks.
  - Financial regulatory easing led to higher valuations for non-financial sector stocks, particularly for industries that are more dependent on bank financing.
- Tool-specific effects:
  - Announcements related to easier bank capital regulation: valuations declined and financial conditions tightened.
  - Announcements related to liquidity regulation easing: equity valuation rose and financial conditions loosened.
- Other measures:
  - Effects from non-regulatory financial measures appear to be generally more muted.

### Policy Implications and Interpretations
- Differentiated impact: Regulatory easing is not uniform—capital and liquidity measures can have opposite effects on equity valuations and overall financial conditions.
- Trade-offs for policymakers:
  - Easing capital regulation may tighten financial conditions via lower financial-sector valuations.
  - Easing liquidity regulation may loosen financial conditions and raise equity valuations.
- Consideration for credit flow objectives:
  - Regulatory easing can facilitate the flow of credit, but tool selection matters for sectoral valuations and overall financial stability.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2021/02/26/handle-with-care-regulatory-easing-in-times-of-covid-19-50126_