By Manesh Samtani, Regulatory Asia | Posted on July 1, 2020
Once the severe illiquidity phase of the crisis has passed and insolvency concerns arise, responsibility for crisis management shifts from central banks to fiscal authorities. During the acute phase of the Covid-19 pandemic, central banks played a key role in the response, working with fiscal and prudential authorities to mitigate the shock and support companies and workers. 2020. “Flexibility, boldness and decisiveness are required. This has been a big challenge, however, given the limited policy space available before the pandemic and the potential loopholes that developed,” said Agustín Carstens, managing director of the BIS.
In its analysis of central bank responses to the "sudden global stop," the BIS highlighted the evolving role of central banks as lenders of last resort, characterized by a shift toward funding the non-bank private sector, with emerging market economies Then it turns to intervene in local currency asset markets. The report also highlights the use of prudential tools to keep banks’ credit flowing to businesses and households by temporarily easing capital and liquidity requirements and encouraging banks to draw freely on their capital buffers. According to the BIS , the next phase of the crisis will shift focus from liquidity to solvency, which will test the long-term viability of many companies, and corporate defaults are likely to surge.
Banks will also suffer losses, affecting their ability to support the recovery. report It said that in order to solve the impending bankruptcy problem, governments will take the lead in promoting a strong and sustainable recovery through prudent fiscal policy. "Only fiscal authorities can directly transfer real resources, not just provide funds. And only they can finally support or implement an effective debt restructuring plan...Cleaning up balance sheets is critical to rebuilding the conditions for a sustainable recovery.
The report urged central banks to plan how to contain Covid-19 support measures amid concerns over financial market complacency, worrisome inflation and continued economic uncertainty.