BIS published a Bulletin (or a short report) that reviews the response of the central banks of the United States, the euro area, Japan, the United Kingdom and Canada to the disruptions caused by COVID-19 pandemic. An appendix accompanying the Bulletin provides further details on the policy measures announced by the central banks in these geographies and describes the assumptions underlying the projections presented in the Bulletin. The Bulletin highlights that central banks responded promptly and forcefully, consistent with their mandates, to preserve smooth market functioning and an effective transmission of monetary policy.
The initial response of central banks was focused primarily on easing financial stress and ensuring a smooth flow of credit to the private non-financial sector. The pandemic triggered complementary responses from monetary and fiscal authorities. Fiscal backstops and loan guarantees supported central bank actions. Asset purchases, designed to achieve central banks’ objectives, helped contain the costs of fiscal expansions. Overall, by addressing credit risk concerns, fiscal support complemented monetary policies directed at sustaining credit to the non-financial private sector.
Looking ahead, the footprint of central banks’ measures on their balance sheet are likely to be seen for a prolonged period. While liquidity and short-term lending programs can be easily reabsorbed at the time of the recovery, assets purchased are typically held to maturity. Under conservative assumptions about the share of outstanding assets purchased by central banks under each program and a plausible take-up and rollover of lending operations, the authors project the size of central banks’ balance sheets to expand in 2020 at a faster pace than ever before. With the outbreak of COVID-19, earlier hopes of ending up in a pre-global financial crisis (GFC) environment characterized by lean central bank balance sheets over the near future have faded away.
Keywords: International, Banking, COVID-19, Loan Guarantee, Credit Risk, Central Bank Balance Sheets, Policy Actions, BIS
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