Lessons learnt from the COVID-19 pandemic from a financial stability perspective: Interim report
The COVID-19 pandemic presents a real-life test that may hold important lessons for financial policy, including the functioning of G20 reforms.
The COVID-19 pandemic is the first major test of the global financial system since the G20 reforms were put in place following the financial crisis of 2008. While significantly different in nature from the 2008 crisis, this real-life test may hold important lessons for financial policy, including the functioning of the G20 reforms.
The report identifies preliminary lessons for financial stability from the COVID-19 experience and aspects of the functioning of the G20 financial reforms that may warrant attention at the international level.
The report notes that, thus far, the global financial system has weathered the pandemic thanks to greater resilience, supported by the G20 reforms, and the swift, determined and bold international policy response. Authorities broadly used the flexibility within international standards to support financing to the real economy. Monitoring and coordination, guided by the FSB COVID-19 Principles, has discouraged actions that could distort the level playing field and lead to harmful market fragmentation.
The COVID-19 experience reinforces the importance of completing remaining elements of the G20 reform agenda. The financial stability benefits of the full, timely and consistent implementation of those reforms remain as relevant as when they were agreed. Those parts of the global financial system where implementation of the reforms is most advanced displayed resilience. The pandemic has highlighted the importance of effective operational risk management arrangements and the need to further enhance crisis management preparedness and promote resilience amidst rapid technological change.
The pandemic also highlighted differences in resilience within and across financial sectors. The March 2020 market turmoil has underscored the need to strengthen resilience in non-bank financial intermediation. The functioning of capital and liquidity buffers may warrant further consideration, while some concerns about excessive financial system procyclicality remain.
COVID-19 may yet test the resilience of the global financial system. Banks and non-bank lenders could face additional losses as support measures are unwound. Identifying systemic vulnerabilities early on remains a priority. One of the legacies of the pandemic may be a build-up of leverage and debt overhang in the non-financial sector. Addressing debt overhang, including by facilitating the market exit of unviable companies and by promoting the efficient reallocation of resources to viable firms, may be a key task for policymakers going forward.
The FSB will engage with external stakeholders on preliminary findings and issues raised in this report. The final report, which will incorporate this feedback and set out tentative lessons and next steps to address the identified issues, will be delivered to the G20 Summit in October.