May 24, 2021

Financial Groups Highlight "Vital" Role of Financial Markets during COVID-19

The Financial Services Forum, the Institute of International Finance and ISDA detailed how financial markets and participants provided "vital" support to the economy during the COVID-19 pandemic.

In the report, the authors examined:

  • Financial System Strength and Resilience. The report stated that banks were able to "absorb and manage, rather than amplify" the economic shock because of the past decade's regulatory reform, which ensured strong capital and liquidity positions and reduced counterparty credit risk through central clearing and collateralization of exposures.

  • Access To Credit. The report cited the Bank for International Settlements, which reported that U.S. bank credit expanded by over $400 billion in a single quarter, and that bank lending in the EU, UK and Japan satisfied credit demand at three to five times the normal rate for loans. These same jurisdictions also experienced a "significant inflow" of deposits.

  • Ability to Raise Capital. The public securities market saw a surge in bond issuance and a rebound in primary equity issuance.

  • Secondary Markets and Market-Making. The report found that large banks supported the secondary markets by increasing inventory holding and "actively" making markets in derivatives.

The authors suggested in the report that policymakers and regulators use "new and fresh" data from the pandemic to consider the efficacy of existing policies relating to risk-insensitive leverage requirements, the "usability" of capital and liquidity buffers, the potential procyclicality of the regulatory framework, and post-trade risk reduction measures.