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

The policy response to the COVID-19 shock included regulatory easing across many jurisdictions to facilitate the flow of credit to the economy and mitigate a further amplification of the shock through tighter financial conditions. Using an intraday event study, this paper examines how stock prices – a key driver of financial conditions – reacted to regulatory easing announcements in a sample of 18 advanced economies and 8 emerging markets. It finds that regulatory easing announcements contributed to looser financial conditions but effects varied across sectors and tools. News about regulatory easing led to lower valuations for financial sector stocks, mainly in jurisdictions with relatively lower capital buffers. These results stand in stark contrast with valuations of non-financial sector stocks, which increased in response to regulatory relief announcements, particularly in industries that are more dependent on bank financing. The effects also differed across tools. Valuations declined and financial conditions tightened following announcements related to easier bank capital regulation while equity valuation rose and financial conditions loosened after those about liquidity regulation.

Liquidity Provision and Co-insurance in Bank Syndicates

We study the capacity of the banking system to provide liquidity to the corporate sector in times of stress and how changes in this capacity affect corporate liquidity management. We show that the contractual arrangements among banks in loan syndicates co-insure liquidity risks of credit line drawdowns and generate a network of interbank exposures. We develop a simple model and simulate the liquidity and insurance capacity of the banking network. We find that the liquidity capacity of large banks has significantly increased following the introduction of liquidity regulation, and that the liquidity co-insurance function in loan syndicates is economically important. We also find that borrowers with higher reliance on credit lines in their liquidity management have become more likely to obtain credit lines from syndicates with higher liquidity. The assortative matching on liquidity characteristics has strengthened the role of banks as liquidity providers to the corporate sector.

The Costs and Benefits of Liquidity Regulations: Lessons from an Idle Monetary Policy Tool

We investigate how liquidity regulations affect banks by examining a dormant monetary policy tool that functions as a liquidity regulation. For causal inference, we use a regression kink design that relies on the variation in a marginal high-quality liquid asset requirement around an exogenous threshold. We show that mandated increases in liquidity cause banks to reduce credit supply. Liquidity requirements also depress banks’ profitability, though some of the regulatory costs are passed on to liability holders. We document a prudential benefit of liquidity requirements by showing that banks subject to a higher requirement just before the financial crisis had lower odds of failure.

Issues of improving the mechanisms for regulating the liquidity of commercial banks in developed countries

This article discusses the improvement of liquidity regulation mechanisms for commercial banks in developed countries. This article will consider such concepts as “liquidity”, “liquidity management”, “liquidity management mechanism”, and the existing approaches to its definition, as well as the bank’s information infrastructure, which is necessary and sufficient for the implementation of effective liquidity management. It should be noted that the emphasis will be placed on the aspects and approaches to liquidity management directly by the commercial bank itself, and not on prudential or other norms aimed at assessing the risk of a bank losing its liquidity. The purpose of this article is to consider the existing approaches to liquidity management, their advantages and disadvantages, for possible use in the future as basic ones for the planned study.

Handle with Care

The policy response to the COVID-19 shock included regulatory easing across many jurisdictions to facilitate the flow of credit to the economy and mitigate a further ampli-fication of the shock through tighter financial conditions. Using an intraday event study,this paper examines how stock prices—a key driver in financial conditions—reacted to regulatory easing announcements in a sample of 18 advanced economies and 8 emerging markets. The paper finds that overall, regulatory easing announcements contributed to looser financial conditions, but effects varied across sectors and tools. Financial regulatory easing led to lower valuations for financial sector stocks, and higher valuations for non-financial sector stocks, particularly for industries that are more dependent on bank financing. Furthermore, valuations declined and financial conditions tightened following announcements related to easier bank capital regulation while equity valuation rose and financial conditions loosened after those about liquidity regulation. Effects from non-regulatory financial measures appear to be generally more muted.