Yale School of Management

Posts by Macroprudential Policies

COVID-19 and Insurance (1 of 3): Helping Individuals and Businesses

June 15, 2020
Insurance companies face unusual challenges during the COVID-19 crisis. This blog describes efforts by companies and their supervisors to: Reduce financial burdens on insurance customers, for example, by allowing them to defer premium payments.  Resolve the controversy over whether existing insurance coverage extends to businesses that have lost revenue during the crisis. Continue reading “COVID-19 and Insurance (1 of 3): Helping Individuals and Businesses”

Easing Liquidity Regulations to Counter COVID-19

April 27, 2020
Many countries are easing liquidity regulations to help banks get cash to their customers and to prevent liquidity shortages from spreading across financial markets. Countries are addressing liquidity shortages using two main tools: the liquidity coverage ratio (LCR), which most developed countries implemented in recent years as part of the Basel III agreements, and the more traditional reserve requirement ratio. Continue reading “Easing Liquidity Regulations to Counter COVID-19”

Governments Provide Financial Regulatory Relief

April 22, 2020
The COVID-19 crisis has led governments across the world to temporarily ease the operational burden of  supervisory and regulatory activities on the financial institutions they regulate. These regulatory relief efforts can be broken down into three major categories:  Reducing supervisory activities such as stress tests and bank examinations.  Delaying the implementation of new rules or laws.  Reducing reporting requirements. Continue reading “Governments Provide Financial Regulatory Relief”

Countries Ease Bank Capital Buffers

April 16, 2020
Countries around the world are easing bank capital requirements to help banks absorb losses and to allow them to maintain the flow of credit during the COVID-19 crisis.  Most of these measures involve the Basel III capital standards that global regulators agreed to implement after the 2007-09 financial crisis. Thanks to Basel III and like measures, banks across the world have substantially more capital than they had heading into that crisis. However, the current crisis threatens to quickly eat into those capital cushions. Banks are already reporting substantial credit losses and growing balance sheets, as they meet existing commitments and extend new loans. Easing capital standards today is a form of macroprudential policy, because regulators’ focus is on maintaining the health of the financial system as a whole.  Continue reading “Countries Ease Bank Capital Buffers”

Countering COVID-19 with Countercyclical Bankruptcy Policy

April 9, 2020
Governments are temporarily tilting their bankruptcy laws in favor of debtors to help businesses survive the crisis. Some have taken advantage of the crisis to propose permanent pro-debtor bankruptcy reforms.  Many countries have found that their current bankruptcy laws do not offer enough relief to debtors in these difficult times. This even applies to countries with pro-debtor systems, like Chapter 11 in the United States, that aim to avoid liquidations and restructure all companies that are viable as going concerns. Due to COVID-19, many otherwise viable businesses see themselves without a strategy for recovery until social-distancing measures end. Policymakers fear that this will force countless businesses to liquidate, leaving even more workers unemployed. So many bankruptcies could overwhelm bankruptcy courts, drawing out an already painful process.  Continue reading “Countering COVID-19 with Countercyclical Bankruptcy Policy”

What macroprudential policies are countries using to help their economies through the Covid-19 crisis?

April 6, 2020
Countries around the world are reeling from the health threat and economic and financial fallout from COVID-19. Legislatures are responding with massive relief programs. Central banks have lowered interest rates and opened lender-of-last-resort spigots to support the flow of credit and maintain financial market functioning. Authorities are also deploying macroprudential policies, many of them developed or improved since the global financial crisis of a decade ago. In this blog, we describe the main macroprudential measures that countries have taken recently. We summarize specific actions and factors considered when relaxing bank capital, loan forbearance, and liquidity requirements. Since late January, about 50 countries have made more than 230 announcements, with up to 500 separate actions, based on current entries in the new Yale Program on Financial Stability 2020 Financial-Intervention Tracker. Macroprudential announcements represent 40 percent of the announcements in the tracker, which also includes those for fiscal, monetary, and emergency liquidity (see figures). Continue reading “What macroprudential policies are countries using to help their economies through the Covid-19 crisis?”

Authorities Restrict Short Sales during COVID-19 Crisis

April 1, 2020
The COVID-19 pandemic has created extraordinary uncertainty; it is too early to predict how bad it will get or how it will impact the world economy. This uncertainty has substantially elevated the volatility in bond and equity markets. In response, several countries have placed restrictions on short sales. In short sales, an investor sells a security she doesn’t own, hoping to profit when its price falls. Economists generally find that the benefits of short selling to market efficiency and liquidity outweigh the potential costs, most of the time. But authorities argue that short sales amidst extreme uncertainty can excessively deflate market prices and lead to further market contagion in a crisis. We discuss: (i) short-sale restrictions during the COVID-19 crisis, (ii) similar actions in earlier crises, and (iii) key design decisions that authorities face in restricting short sales. Continue reading “Authorities Restrict Short Sales during COVID-19 Crisis”

US Eases Impact of Accounting Rules for Borrowers Affected by COVID-19

March 31, 2020
On March 27, the US acted to delay the implementation of a new accounting rule to ease its impact on banks whose borrowers have been affected by COVID-19. The new accounting standard, known as “current expected credit losses” (CECL), had been set to take effect this year for the largest US banks and over the next two years for other banks. It requires banks to provision for all “expected” losses over the life of a loan. The previous “incurred loss” standard, which is still in place as banks transition to the new standard, requires them to recognize losses only when they become “probable.” Continue reading “US Eases Impact of Accounting Rules for Borrowers Affected by COVID-19 ”

CARES Act Provides Mortgage Forbearance

March 30, 2020
The $2 trillion CARES Act, signed by the President on March 27, 2020, provides consumer credit and mortgage forbearance to keep people in their homes while the coronavirus lockdown continues. For homeowners and renters, Title IV of the CARES Act includes mortgage forbearance and renter protection, a foreclosure moratorium, eviction protection, easing accounting standards for borrowers who miss payments, and changes to credit reporting requirements. Continue reading “CARES Act Provides Mortgage Forbearance”