Impact Of COVID-19 On The Global Financial System

Amid COVID-19, global financial systems have been a source of both support and potential risks.

During the on-going COVID-19 pandemic, the aid of global financial systems have been indispensable in preventing economic fallout. However, they are also turning out to be sources of massive risk.

In their white paper, Impact of COVID-19 on the Global Financial System, the World Economic Forum (WEF) identifies the roadblocks in the future ahead of the world’s financial and monetary systems.  Here, we will boil it down to the main points.

Emerging risks

The COVID-19 pandemic fueled a risk-off environment as early as the end of February 2020. The stock market recorded some of the worst crashes in history around this period.

When signs of stress have emerged, central banks have quickly jumped in to expand asset programmes and consequently pumped liquidity into the market. As advanced economies announced their fiscal support packages, equity markets experienced rebounds by the end of March.

Banks have been relatively resilient and also served as the main transmission mechanism for the business support component of a lot of fiscal packages in the world.

While financial systems have seemingly managed the initial phase of the financial crisis relatively well — though it is too early to judge the efficacy of responses for the long run — there are still emerging risks which may threaten stability and even the post-pandemic prospect of recovery.

Among these risks include a credit crunch brought upon by banks facing credit losses more massive than what their balance sheets could handle. This increases the possibility of severe recession.

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The focus on small and large businesses also may place middle-market firms at risk. Failure to support this segment can also lead to balance sheet losses for both investors and banks.

The concentration of support policies are in advanced economies which have ample fiscal space to respond. This means that emerging and developing economies which do not have this capacity are also susceptible to fallout.

Policy recommendations

To handle these risks, the Forum laid down four key policy recommendations:

  • Prioritise flattening the curve of firm mortality. This involves expanding the size of support programs so that they can outlast the duration of the pandemic. This also entails the focus on maintaining fund availability for both SMEs and large corporations. There is also a need to consider going beyond liquidity support and accessing equity in firms to keep them intact.
  • Coordinate policies on a global level. By maintaining international cooperation, confusion can be minimised and operational burden on firms can be avoided. Moving through the same direction can amplify the effectiveness of fiscal response.
  • Leverage digital channels to safely meet the need for financial services. Digital platforms are both efficient and safe means to provide financial services in the midst of a pandemic. By taking advantage of them, small businesses and households can better access the support they need. Partnerships with the fintech sectors can help accelerate this process.
  • Expand support to emerging and developing markets. Being the hardest-hit sectors of the market, advanced economies should continue and expand their support programmes for these countries.
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