The Covid-19 pandemic has capsized the functioning of all financial institutions across the world. With unpredictable amplitude on the supply and demand side, there is potential for even further market disruption. Institutions and individuals alike are failing to maintain their liquidity profile and are experiencing limited access to credit. The threat of large scale default has never been higher in the last decade or so.
Central banks across the globe, are proactively intervening to tranquilize the markets. In its first emergency move since the recession of 2008, the US Federal Reserve cut the federal funds rate by 50 basis points. The Federal Reserve has also actively intervened by promoting repurchasing agreements to increase liquidity in the market. The Bank of Japan has issued an emergency statement indicating that it would inject liquidity into the market by increasing the asset purchases. The Peoples Bank of China has also pumped more than US$240 billion of liquidity into the financial system as a countermeasure to the virus.
But as the situation worsens, more innovative steps will be required on part of central banks, regulatory bodies and governments. The global nature of the recession has shown why international cooperation must trump an isolated economic strategy on part of all countries.
Unprecedented changes to the traditional work regime are being hailed as key weapon to keep markets business functioning. Banking and capital markets firms around the world are changing their day-to-day operation practices. Firms are testing and implementing business contingency plans, which allow alternate workplace arrangements such as split work sites, work from home, rotating shifts etc. for all categories of employees and even traders. Heightened precautionary measures such as temporary travel bans towards countries experiencing the most severe effects, and cancelling all international business events are being implemented. Banks have requested market regulators to ease capital requirements. Regulators, such as the US Securities and Exchange Commission (SEC), have proactively granted relief for regulatory financial reporting to companies affected by COVID-19.
Banks across nations are stepping up and providing loans to hard-hit borrowers, renegotiating credit terms, and technologically assisting their clients. While countries around the globe are hitting record low economic performance, it is intriguing however that the stock markets of many major economies have already started rallying forward. This is the biggest indicator that the cooperation of government and financial entities have not lost its control even in the face of such an unprecedented disaster.
While it is impossible to make any assessments on the longevity of the pandemic, economies big and small across the globe have maintained optimism regarding a huge surge in capital markets post covid with their implementation of innovative strategies.
This article was first published in Legally Bullish