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Financial Crime in Times of Covid-19 - AML and Cyber Resilience Measures
From the Highlights: "'[1] Criminals are exploiting vulnerabilities opened up by the Covid-19 [coronavirus disease 2019] lockdown, increasing the risks of cyber attacks, money laundering (ML) and terrorist financing (TF). [2] Authorities worldwide have responded by drawing financial institutions' attention to these threats and by providing guidance on ways to improve cyber security and mitigate ML and TF risks. [3] Financial authorities are warning financial institutions to be particularly watchful in relation to their IT [information technology] networks and non-public data; third-party risk; and cyber security incident response plans; and to focus additional effort on staff training and awareness. [4] Financial authorities also emphasise the need for financial institutions to be vigilant of new ML and TF risks and to continue meeting anti-money laundering (AML) and combating the financing of terrorism (CFT) requirements, while using the flexibility built into the AML/CFT risk-based framework, digital customer on-boarding and simplified due diligence processes. [5] In both areas, the official guidance underscores the trade-offs between expecting financial institutions to enhance or adjust their cyber resilience and AML frameworks and, on the other hand, avoiding imposing an excessive burden that could hinder financial institutions in delivering key financial services.'"
Bank for International Settlements
Crisanto, Juan Carlos; Prenio, Jermy
2020-05
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Identifying Regions at Risk with Google Trends: The Impact of Covid-19 on US Labour Markets
From the Key Takeaways: "[1] Information on local labour markets and Google searches can be used to construct a measure of the vulnerability of employment in different regions of the United States to the Covid-19 [coronavirus disease 2019] shock. [2] Regional exposure to Covid-19 varies significantly, ranging from a low of 2% to a high of 98% of total local employment. [3] We test for the usefulness of the Covid-19 exposure measure by showing that areas with higher exposure report more Google search queries related to the pandemic and unemployment benefits."
Bank for International Settlements
Doerr, Sebastian; Gambacorta, Leonardo
2020-04-21
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Effects of Covid-19 on the Banking Sector: The Market's Assessment
From the Document: "Banks have been harder hit than most sectors since the unsettlingly rapid global spread of Covid-19 [coronavirus disease 2019] sent financial markets into a tailspin. This Bulletin examines markets' assessment of banks' performance thus far. The focus is on stock prices, credit default swap (CDS) and bond spreads, and credit ratings. The price dynamics have been similar across equity and fixed income markets. Following generally contained declines during the early stages of the crisis, prices fell dramatically after 5 March, in a manner comparable to the immediate post-Lehman bankruptcy period. A stabilisation and partial recovery set in shortly after the middle of the month, on the back of unprecedented policy measures taken by central banks and other authorities. The policy measures also marked a turning point in terms of the extent to which investors were differentiating across banks according to their pre-pandemic characteristics. During the initial period (from mid-February to mid-March), the sell-off was broad and quite indiscriminate, even though Chinese banks remained relatively unscathed and the riskiest banks experienced the largest increase in CDS spreads. The differentiation became more pronounced during the stabilisation phase (from mid-March onwards), when profitability and balance sheet strength - as reflected in capitalisation, stable funding and credit ratings - became particularly good indicators of developments in bank stock prices, CDS spreads and rating outlooks. The importance that markets attribute to strong balance sheets is likely to increase in an environment that sees a further weakening of borrowers' financial health."
Bank for International Settlements
Aldasoro, Iñaki; Fender, Ingo; Hardy. Bryan . . .
2020-05-07
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Covid-19, Cash, and the Future of Payments
From the Key Takeaways: "'[1] The Covid-19 [coronavirus disease 2019] pandemic has fanned public concerns that the coronavirus could be transmitted by cash. [2] Scientific evidence suggests that the probability of transmission via banknotes is low when compared with other frequently-touched objects, such as credit card terminals or PIN [personal identification number] pads. [3] To bolster trust in cash, central banks are actively communicating, urging continued acceptance of cash and, in some instances, sterilising or quarantining banknotes. Some encourage contactless payments. [4] Looking ahead, developments could speed up the shift toward digital payments. This could open a divide in access to payments instruments, which could negatively impact unbanked and older consumers. The pandemic may amplify calls to defend the role of cash - but also calls for central bank digital currencies.'"
Bank for International Settlements
Auer, Raphael; Cornelli, Giulio; Frost, Jon
2020-04-03
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Insurance Regulatory Measures in Response to Covid-19
From the Highlights: "[1] Currently, insurers are more likely to experience losses from financial market volatility than from higher insurance claims arising from Covid-19 [coronavirus disease 2019]. Few insurance supervisors have seen a need to strengthen or adjust prudential requirements to insulate insurers from current financial market uncertainties. [2] So far, authorities have responded mainly by taking measures to provide operational relief to insurers from regulatory and supervisory requirements so that they can continue providing insurance services. These measures will also help insurers to enhance risk monitoring of their Covid19 financial exposures. [3] Some authorities have set out expectations for insurers to conserve capital through prudent exercise of dividend and variable remuneration policies. The aim is to enhance their resilience against huge uncertainties from potential Covid-19 fallout. Other capital-related measures should relieve supervisory pressures and reduce the tendency of insurers to manage their investments in a procyclical manner. These measures include: extending the supervisory intervention ladder, triggering the countercyclical lever and recalibrating capital requirements. [4] The far-reaching impact of Covid-19 calls for sustained vigilance by both supervisors and insurers. In the post-pandemic phase, the extraordinary measures currently warranted will need to be unwound through a carefully crafted exit strategy that preserves sound risk management practices and protects policyholders' interests."
Bank for International Settlements
Yong, Jeffery
2020-04
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Expected Loss Provisioning Under a Global Pandemic
From the Introduction: "The 2007-09 GFC [Great Financial Crisis] exposed significant shortcomings in the accounting principles that underpinned banks' loan loss provisioning practices. At the time, the accounting standard for loan loss provisioning was based on a so-called incurred loss (IL) model, limiting the ability of banks to recognise loan loss provisions in advance of a loss event. It was also criticised as being procyclical, because a large amount of provisions were recognised only after losses became evident. [...] This paper takes stock of the measures introduced in several jurisdictions to influence how ECL [expected credit losses] methodologies can be applied under the current Covid-19 [coronavirus disease 2019] pandemic. Section 2 compares the key features of incurred and ECL methodologies, while Section 3 summarises the actions taken in the United States and in selected IFRS [International Financial Reporting Standards] jurisdictions that have adopted ECL provisioning frameworks. This section also reviews the cumulative impact of these measures on a bank's financial metrics."
Bank for International Settlements
Zamil, Raihan
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Emerging Market Economy Exchange Rates and Local Currency Bond Markets Amid the Covid-19 Pandemic
From the Key Takeaways: "[1] Borrowing through domestic currency bonds has not insulated emerging market economies (EMEs) from the financial shock unleashed by Covid-19 [coronavirus disease 2019]; EME local currency bond spreads spiked amid sharp currency depreciations and capital outflows. [2] Portfolio investors face amplified losses as local currency spreads and exchange rates move in lockstep; their revised portfolio allocations in turn strengthen this correlation. [3] EMEs with monetary policy frameworks that are equipped to address the feedback loop between exchange rate depreciation and capital outflows stand a better chance of weathering the financial fallout from the Covid-19 pandemic. [4] To counter large stock adjustments in domestic bond markets, EME central banks may need to expand their toolkit to take on a 'dealer of last resort' role; a number of them are already moving in this direction."
Bank for International Settlements
Hofmann, Boris; Shim, Ilhyock; Shin, Hyun Song
2020-04-07
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Macroeconomic Spillover Effects of the Pandemic on the Global Economy
From the Key Takeaways: "[1] Given the historical persistence of economic activity, the reduction of GDP due to confinement measures is likely to drag on over several quarters. The total GDP shortfall could be as much as twice that implied by the direct initial effects of confinement. [2] This persistence reflects in part two types of spillovers across countries. One is due to the risk that uncoordinated confinements lead to repeated virus outbreaks and confinements across the globe. Another is the more traditional trade and financial integration interlinkages. [3] Economic spillovers and spillbacks across the major economic blocs are large. There is no immunity from the economic effects if the epidemic is controlled in only one or two regions. Countries should adopt confinement, border control and macroeconomic policies that internalise these global considerations."
Bank for International Settlements
Rees, Daniel I.; Kohlscheen, Emanuel; Mojon, Benoît
2020-04-06
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Reflections on Regulatory Responses to the Covid-19 Pandemic
From the Introduction: "The Covid-19 [coronavirus disease 2019] pandemic raises the prospect of a deep recession. Hence the unprecedentedly broad-based policy response. To cushion the economic blow, the authorities have deployed not only monetary and fiscal policies but also prudential regulation and supervision and other financial policies. What types of financial measure have been implemented? What is their rationale? What are their pros and cons? In this article we address these questions based on a simple framework and a set of principles that can guide the assessment."
Bank for International Settlements
Borio, C. E. V.; Restoy, Fernando
2020-04
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Macroeconomic Spillover Effects of the Pandemic on the Global Economy: Appendix
From the Document: "Although some economic dislocation is unavoidable in order to contain the spread of the virus, the overall economic consequences will depend on how quickly economic activity rebounds after confinement measures are repealed. Two economic parameters play a central role in the response to the pandemic: the persistence of output fluctuations within each part of the world and the strength of international spillovers."
Bank for International Settlements
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US Dollar Funding Markets During the Covid-19 Crisis - the Money Market Fund Turmoil
From the Document: "The Covid-19 [coronavirus disease 2019] crisis severely disrupted the functioning of short-term US dollar funding markets, in particular the commercial paper and certificate of deposit segments. Commercial paper (CP) is a form of short-term unsecured debt commonly issued by banks and non-financial corporations and primarily held by prime money market funds (MMFs). Certificates of deposit (CDs) are unsecured debt instruments issued by banks and largely held by non-bank investors, including prime MMFs. Both instruments are important sources of US dollar funding for banks, especially for non-US headquartered banks."
Bank for International Settlements
Eren, Egemen; Schrimpf, Andreas; Sushko, Vladyslav
2020-05-12
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Dollar Funding Costs During the Covid-19 Crisis Through the Lens of the FX Swap Market
From the Key Takeaways: "[1] Since the start of the Covid-19 [coronavirus disease 2019] pandemic, indicators of dollar funding costs in foreign exchange markets have risen sharply, reflecting both demand and supply factors. [2] The demand for dollar funding has grown in recent years, reflecting the currency hedging needs of corporates and portfolio investors outside the United States. [3] Against this backdrop, the financial turbulence of recent weeks has crimped the supply of dollar funding from financial intermediaries, sharply lifting indicators of dollar funding costs. [4] These costs have narrowed after central banks deployed dollar swap lines, but broader policy challenges remain in ensuring that dollar funding markets remain resilient and that central bank liquidity is channelled beyond the banking system."
Bank for International Settlements
Eren, Egemen; Avdjiev, Stefan; McGuire, Patrick M., 1970-
2020-04-01
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Leverage and Margin Spirals in Fixed Income Markets During the Covid-19 Crisis
From the Key Takeaways: "[1] For a two-week period in mid-March 2020, government bond markets experienced uncharacteristic turbulence, sometimes selling off sharply in risk-off episodes when they would normally attract safe haven flows. [2] Evidence in the US Treasury market points to forced selling of treasury securities by investors who had attempted to exploit small yield differences through the use of leverage. [3] Even though government bonds are safe assets, large holdings by leveraged investors may detract from orderly market functioning and may necessitate interventions by the central bank."
Bank for International Settlements
Schrimpf, Andreas; Shin, Hyun Song; Sushko, Vladyslav
2020-04-02
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CCP-Bank Nexus in the Time of Covid-19
From the Document: "The Covid-19 [coronavirus disease 2019] pandemic led to market turmoil in mid-March. Large price movements prompted large margin calls from central counterparties (CCPs). This strained the liquidity positions of large dealer banks. Banks also hoarded liquid assets, possibly in anticipation of large margin calls. This exacerbated the liquidity squeeze. Nevertheless, CCPs remained resilient, vindicating the post-crisis reforms that incentivised central clearing. The procyclicality of leverage embedded in margining models might have played a role in the events of mid-March. These margin models are critical because they underpin the management of counterparty credit risk. Margin models of some CCPs seem to have underestimated market volatility, in part because they have relied on a short period of historical price movements from tranquil times. These CCPs had to catch up and increase margins at the wrong time, squeezing liquidity when it was most needed. Going forward, the interaction of CCPs with clearing member banks is critical ('CCP-bank nexus'). Importantly, actions that might seem prudent from an individual institution's perspective, such as increasing margins in a turmoil, might destabilise the nexus overall. Therefore, central banks need to assess banks and CCPs jointly rather than in isolation."
Bank for International Settlements
Huang, Wenqian; Takáts, Elöd, 1975-
2020-05-11
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Public Guarantees for Bank Lending in Response to the Covid-19 Pandemic
From the Introduction: "The adverse economic impact of the Covid-19 [coronavirus disease 2019] pandemic is acute and risks worsening. In order to provide liquidity to the economy, governments in several jurisdictions are offering guarantees on bank loans to non-financial companies. These are expected to encourage banks to continue providing credit, and to prevent an even deeper recession, as discussed in Section 2 of this note. Section 3 reviews key features of a sample of guarantee programmes, illustrating approaches taken in response to a systemic crisis such as the current one and highlighting some of the differences between them. Section 4 reviews some complementary measures, and notes some of the key challenges."
Bank for International Settlements
Baudino, Patrizia, 1972-
2020-04
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Covid-19 and Operational Resilience: Addressing Financial Institutions' Operational Challenges in a Pandemic
From the Introduction: "Financial institutions have to deal with two challenges in the face of the Covid-19 [coronavirus disease 2019] pandemic. The first challenge is financial - how to address and mitigate the sharp drop in the value of financial assets or loss of liquidity. The second challenge is operational - how to address the risk of failure of resources (people, processes, technology, facilities and information) to deliver business services. Financial sector authorities are concerned with both sets of challenges, given that the response of financial institutions has implications for the provision of the financial services that support the economy. Since the onset of the Covid-19 pandemic, some authorities have issued guidance to help financial institutions address these challenges. This paper looks at some of the initiatives that are specifically aimed at helping address operational challenges and ensuring business continuity."
Bank for International Settlements
Coelho, Rodrigo; Prenio, Jermy
2020-04
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Buffering Covid-19 Losses - The Role of Prudential Policy
From the Key Takeaways: "[1] By allowing banks to run down some of their buffers, policymakers are sending a strong signal about their resolve to lessen the economic fallout from the pandemic. Such prudential measures complement the main policy levers: monetary and fiscal instruments. [2] To avoid a reduction in credit to the real economy, authorities need to ensure that banks have the capacity and willingness to make use of the flexibility afforded by the buffer release. Payout restrictions on banks and risk-sharing between banks and the public sector will be key. [3] For banks to continue playing a positive role in the supply of funding during the recovery, they should maintain usable buffers for a long period, as losses from a severe recession will take time to materialise."
Bank for International Settlements
Tarashev, Nikola A., 1973-; Tsatsaronis, Kostas; Drehmann, Mathias . . .
2020-04-24
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Macroeconomic Effects of Covid-19: An Early Review
From the Introduction: "The Covid-19 [coronavirus disease 2019] pandemic is not only the most serious global health crisis since the 1918 Great Influenza (Spanish flu), but is set to become one of the most economically costly pandemics in recent history. Experience with past epidemics provides some insights into the various channels through which economic costs could arise, in the short as well as longer term. At the same time, Covid-19 differs from previous episodes in several important ways. Notably, the globally synchronised lockdowns and trauma of financial markets reinforce one another into an unprecedented economic sudden stop. For these reasons, the Covid-19 global recession is unique. However, past epidemics can shed light on transmission channels to the economy, especially when stringent containment policies are not in place. This Bulletin provides an early review of empirical studies on the economic costs of epidemics. We first review studies on past epidemics, and then turn to the latest quantitative estimates of Covid-19's impact on global growth."
Bank for International Settlements
Rungcharoenkitkul, Phurichai, 1977-; Boissay, Frédéric
2020-04-17
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US Dollar Funding Markets During the Covid-19 Crisis - The International Dimension
From the Key Takeaways: "[1] Dislocations in domestic US dollar money markets reverberated globally. Non-US banks lost a substantial part of funding from money market funds and had to borrow at shorter maturities. [2] Nevertheless, the severity of dollar funding strains varied substantially across banks, and eased for banks from jurisdictions with standing swap lines with the Federal Reserve. [3] The impact of policy measures to quell the stress was felt unevenly across different funding markets. The divergence between key rates resulted in an unusual divergence of funding cost metrics, with some indicating a 'dollar glut' while others a 'dollar shortage'."
Bank for International Settlements
Sushko, Vladyslav; Schrimpf, Andreas; Eren, Egemen
2020-05-12
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Covid-19 and Corporate Sector Liquidity
From the Key Takeaways: "[1] The Covid-19 [coronavirus disease 2019] shock is placing enormous strains on corporates cash buffers. Corporate financial statements from 2019 suggest that 50% of firms do not have sufficient cash to cover total debt servicing costs over the coming year. [2] Credit lines could provide firms with additional liquidity. On average undrawn credit stood around 120% of debt servicing costs at end 2019. However, access is uneven and banks may be reluctant to renew or extend them in the current environment. [3] Sticky operating expenses result in many firms running operating losses, placing an additional burden on cash buffers. Estimates indicate that following a 10% drop in revenues, operating expenses only fall by 6% on average. [4] Simulations suggest that if revenues fall by 25% in 2020, then closing the entire funding gap with debt would raise firm leverage by around 10 percentage points."
Bank for International Settlements
Banerjee, Ryan N.; Illes, Anamaria; Kharroubi, Enisse . . .
2020-04-28
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Releasing Bank Buffers to Cushion the Crisis - A Quantitative Assessment
From the Key Takeaways: "[1] Banks globally entered the Covid-19 [coronavirus disease 2019] crisis with roughly US$ 5 trillion of capital above their Pillar 1 regulatory requirements. [2] The amount of additional lending will depend on how hard banks' capital is hit by the crisis, on their willingness to use the buffers and on other policy support. [3] In an adverse stress scenario such as the savings and loan crisis, banks' usable buffers would decline to US$ 800 billion, which could support US$ 5 trillion of additional loans (6% of total loans outstanding). Yet in a severely adverse scenario, similar to the Great Financial Crisis, the corresponding figures would be only US$ 270 billion and US$ 1 trillion (1.3% of total loans)."
Bank for International Settlements
Lewrick, Ulf; Schmieder, Christian, 1976-; Takats, Elod . . .
2020-05-05
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Recent Distress in Corporate Bond Markets: Cues from ETFs
From the Key Takeaways: "[1] Amid widespread sell-offs in risky asset classes, corporate bond exchange-traded funds (ETFs) traded at steep discounts to underlying asset values in March. [2] Contributing factors were high market volatility, reduced risk-taking by dealers and investors' reaction to policy decisions. [3] Policy interventions that improve market functioning in a given sector can have temporary yet important spillovers to other segments through portfolio rebalancing by investors."
Bank for International Settlements
Aramonte, Sirio; Avalos, Fernando
2020-04-14
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Measures to Reflect the Impact of COVID-19
From the Introduction: "Governments and banks in many jurisdictions have introduced extraordinary measures to alleviate the financial and economic impact of Covid-19 [coronavirus disease 2019]. The relief measures include a range of different payment moratoriums and government guarantees. The Basel Committee on Banking Supervision has agreed that the risk-reducing effects of the various extraordinary support measures taken in its member jurisdictions should be fully recognised in risk-based capital requirements. The Committee has also discussed the impact of Covid-19 on the expected credit losses (ECLs) of banks. The Committee agreed that the extraordinary support measures should be taken into account by banks when they calculate their ECLs. It also agreed on some amendments to the transitional arrangements for the regulatory capital treatment of ECLs. This document sets out guidance on these issues."
Bank for International Settlements; Basle Committee on Banking Supervision
2020-04
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