In continuation of a series of Bulletins on the impact of COVID-19 pandemic, BIS published a brief report, or Bulletin, that examines financial resilience of households against the COVID-19 shock. The Bulletin takes stock of the policy interventions in select jurisdictions, along with their related implications. In conclusion, it outlines how the various temporary, targeted, and expansionary policy measures can strengthen financial resilience of households and businesses by transferring risks to the respective governments and banks.
This Bulletin documents, in three steps, cross-country variation in financial resilience of households. First, it looks at current levels of household debt and the corresponding debt service burdens. There is considerable variation, both between countries and within individual countries. Second, the Bulletin examines the adequacy of liquid buffers held by indebted households, given their debt service burdens. In several countries, households in the lower half of the net wealth distribution hold insufficient liquid buffers to weather a protracted spell of unemployment. In the third step, household financial resilience is compared with estimates of exposure to the COVID-19 shock, measured in terms of higher unemployment forecasts. This reveals that large exposures are not necessarily matched by buffers of commensurate size. The concluding section discusses how various policies can bolster resilience or alleviate the unemployment impact of the COVID-19 shock.
Policymakers have taken various measures to boost households’ resilience or alleviate the unemployment impact of the COVID-19 shock. Low interest rates and debt repayment moratoria bolster resilience by temporarily lowering debt burdens. In jurisdictions where debt service costs are more sensitive to interest rates (because mortgages, the bulk of household debt, are adjustable rather than fixed rate), rate cuts will pass through to debt servicing costs (for example, Australia, Korea, Spain, and the United Kingdom). Meanwhile, low interest rates will support the economic recovery, reducing the risk that income loss will be long-lasting. Most countries in the sample have loosened their monetary policy, with a few offering temporary debt relief.
An expansionary fiscal policy safeguards households against the prospect of income loss. Policymakers have implemented targeted income support schemes in several jurisdictions. They have also expanded access to unemployment benefits and social protection programs. In addition, authorities have introduced salary subsidies, which transfer (a share of) labor costs for locked-down employees from corporates to the government. Temporary moratoria on tax payments also help, by alleviating liquidity shortfalls. These interventions have (re)distributional implications. Debt repayment moratoria, for example, transfer some of the COVID-19 losses from households to banks (and other creditors). Expansionary fiscal measures entail inter-generational redistribution, with current debt burdens being transferred from the balance sheet of the current poor to that of the government and, thus, to future generations of taxpayers. The ultimate extent of interventions will, therefore, reflect political economy considerations as well as household exposure to the COVID-19 shock.
Keywords: International, Banking, COVID-19, Loan Moratorium, Loan Repayment, Credit Risk, Policy Actions, BIS
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleECB Group Recommends Voluntary Compensation for Legacy Swaptions
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
The European Insurance and Occupational Pensions Authority (EIOPA) proposed to amend the supervisory statement on supervision of run-off undertakings that are subject to Solvency II regulation.
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.