World Bank Financial Policy Priorities in Response to COVID-19
The World Bank Group expectations for financial policy priorities in responses to coronavirus pandemic is contain in its document and detail the following:
- Central banks should maintain their accommodative stance of monetary policy in pursuit of their inflation and financial stability mandates through conventional and unconventional tools for as long as needed to support the flow of credit to households and firms.
- They should also continue to provide liquidity to prevent impairments to funding conditions and functioning in major money, foreign exchange, and securities markets.
- At the same time, central banks should carefully assess which markets are critical for maintaining financial stability and design support programs to minimize moral hazard and risks to themselves.
- Authorities in emerging market and developing economies should use flexible exchange rates to absorb external pressures, where feasible.
- For countries with adequate reserves, exchange rate intervention can lean against market illiquidity and play a role in muting excessive volatility in currency markets.
- In the face of an imminent crisis, capital outflow management measures could be part of a broad policy package, though such measures should be implemented in a transparent manner, be temporary, and be lifted once crisis conditions abate.
- Sovereign debt managers should put in place contingency plans for dealing with limited access to external funding markets for a prolonged period.
- Bank capital, liquidity, and macro prudential buffers should be used to absorb losses and manage liquidity strains and to help support lending to the economy.
- Banks should halt dividend payments and buybacks while the crisis lasts to help support capital buffers.
- In cases where banks face sizable and long-lasting shocks, and where bank capital adequacy is affected, supervisors should take targeted actions, including asking banks to submit credible capital restoration plans.
- Throughout the process, transparent risk disclosure and clear guidance from supervisors will be important.
- Insurance company regulators in countries facing periods of extreme market stress may need to use the flexibility embedded in regulations, for example, to extend the allowed recovery period of affected insurers.
- Supervisors, however, should not lower standards and should ask insurers to prepare credible plans to ensure they can restore their solvency positions while continuing to provide necessary coverage to policyholders.
- Asset managers should continue to ensure that liquidity risk management frameworks are being applied in a robust and effective manner.
- Regulators should support the availability of a wide set of liquidity management tools and encourage fund managers to make full use of the available tools where it would be in the interest of unit holders to do so.
- Standard setters should revisit the macro prudential framework for asset managers.
- Multilateral cooperation is needed to protect the global financial system.
- Bilateral and multilateral swap lines may need to be provided to a broader range of countries to alleviate foreign currency funding pressures.
- Furthermore, any rollback of international financial system regulation or fragmentation through domestic actions that undermine international standards should be avoided.
