This report, which was delivered to G20 Leaders ahead of their November Summit, considers the financial stability impact and policy responses to the COVID-19 event.

Global financial conditions have overall continued to ease since the G20 meeting in July on the back of the decisive policy action taken earlier this year. However, risks to global financial stability remain elevated. Financial conditions may remain vulnerable to sharp shifts in investor sentiment. Deteriorating credit quality of non-financial borrowers poses risks to the financial sector. The intensification of the pandemic, together with the resulting necessary government containment measures as well as greater uncertainty about its duration, is increasing vulnerabilities in the non-financial sector.

These vulnerabilities may increasingly affect banks and the supply of financing to the real economy more generally. Bank capital ratios have held up so far and have allowed banks to continue lending. However, if banks face rising loan losses and a worsening in asset quality, they may be tempted to tighten credit conditions. In addition, further credit ratings downgrades could put bond markets under pressure. There is a risk that a deterioration in corporate sector health could lead to more downgrades.

The evolving nature of the COVID-19 pandemic and the associated economic uncertainties require continued efforts to support financial resilience and ensure a sustained flow of financing to the real economy. It is critical to address potential obstacles to the use of bank capital and liquidity buffers to absorb losses and support lending, while avoiding harmful deleveraging. The use of analytical tools such as stress testing is important to inform the assessment of potential solvency risks on financial stability and adjustments in policy responses. Authorities’ communication of their expectations of future policy, at a time when conditions are changing fast and the outlook is uncertain, is important to support confidence.

The FSB COVID-19 Principles have continued to guide national responses to COVID-19. Coordination of the measures taken by jurisdictions has discouraged unilateral actions that could distort the level playing and lead to market fragmentation.