Featured Product

    BIS Makes Case for Policy Intervention to Ensure Corporate Liquidity

    April 28, 2020

    BIS has published a brief note or Bulletin on the economic effect of COVID-19 outbreak on corporate sector liquidity. Based on a sample of 40,000 listed and large unlisted non-financial firms across 26 advanced and emerging economies, this Bulletin estimates that if 2020 revenues fall by 25%, then, in the absence of any rollover, debt service and operating expenses will exceed cash buffers and revenues in more than half of the firms sampled. Given this challenge, the Bulletin makes a strong case for policy interventions to avoid the negative consequences for the economy and financial markets.

    In the short run, the COVID-19 shock challenges corporate liquidity by impairing corporate cash flows, which will likely go deeply negative for many firms as they are unable to cut their costs in line with plunging revenues. In addition, a number of factors compound this problem. Existing credit lines could provide firms with additional resources to help them meet short-term liquidity needs. However, credit lines often have a short-maturity and under the current stressed conditions banks may be reluctant to renew them. Taken together, these factors are placing enormous strains on corporate cash buffers. Both the ability of firms to roll over debts and the size of their cash buffers will have strong influence on their ability to cover operating losses and debt-service obligations. 

    Many governments have already taken bold action to avoid negative consequences for the real economy and financial markets. Bridging loans would help ensure that the sudden stop to corporate cash flows does not lead firms to a near term default on operating expenses, wages and salaries, or short-term obligations. However, such credit will increase corporate leverage, potentially creating solvency challenges further down the road. Given the size of existing credit lines, authorities may need to develop policies to monitor draw-downs and availability. One risk is that banks do not roll over expiring facilities. In this regard, governments can ease the rollover of credit lines by providing guarantees or credit enhancements. This would reduce bank capital needs when corporates use them.

    The Bulletin emphasizes that mechanisms to prevent the seizing of trade credit would also be important. For example, schemes that help firms sell their receivables or receive credit against them, at least partly, may be needed. One possibility would be for central banks to offer a facility where certain short-term claims collateralized with specific types of assets can be re-discounted. Another would be for governments or a single government-related entity to take advantage of centralization to net out trade credit assets and liabilities. To be sure, such schemes would face limitations, not least in terms of moral hazard (manipulation of trade credit accounts) and adverse selection (assets on most risky borrowers would be submitted first). However, limiting such a facility to firms that did pay taxes over previous years and, hence, have been profitable and to assets and liabilities contracted prior to the virus outbreak could mitigate these limitations.

     

    Related Links

    Keywords: International, Banking, COVID-19, Liquidity Buffer, Liquidity Risk, Credit Risk, Loan Guarantee, Regulatory Capital, BIS

    Featured Experts
    Related Articles
    News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News
    News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News
    News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News
    News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News
    News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News
    News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News
    News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News
    News

    ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite

    The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.

    December 22, 2022 WebPage Regulatory News
    News

    FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates

    The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.

    December 20, 2022 WebPage Regulatory News
    News

    FSB Reports Assess NBFI Sector and Progress on LIBOR Transition

    The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.

    December 20, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8697