Among central banks, the Federal Reserve initiated extraordinary steps not experienced since the 2008-2009 global financial crisis to address the economic effects of COVID-19. According to a March 2021 BIS review of the monetary policies adopted by the central banks of 11 advanced economies and 28 developing economies between February and July 2020 to address the impact of the pandemic, the banks moved quickly and on a massive scale,77 as indicated in Table 5.
Central banks in advanced economies acted to prevent a financial crisis by purchasing assets and providing liquidity at favorable rates. In contrast, central banks in emerging economies responded less aggressively, in part reflecting the success of advanced economy central banks in easing global financial pressures, which effectively made it possible for emerging economies to focus their efforts on supporting domestic demand.
BIS grouped the central bank measures into five categories: (1) interest rates; (2) reserve policies;
(3) lending operations; (4) asset purchases; and (5) foreign exchange policies, including foreign exchange swaps. In some cases, central banks also relaxed capital buffers and countercyclical
77 Cantu, Carlos, Paolo Cavalino, Fiorella De Fiore, and James Yetnam, A Global Database of Central Banks’
Monetary Responses to COVID-19, BIS Working Papers No. 934, Bank for International Settlements, March 2021, p.5.
capital buffers,78 adopted after the 2008-2009 financial crisis.79 Generally, however, banks did not use their capital buffers to supply credit in their respective economies.80
The five policy areas identified by BIS are
Interest rates. Interest rates were reduced in most countries, except in Japan and the Euro area, where interest rates were zero. In numerous countries, monetary authorities attempted to ease the concerns of financial market participants by announcing they would maintain accommodative policies (low interest rates) for an extended period.
Reserve policies. With low interest rates, some central banks adjusted reserve requirements for commercial banks, which alters the amount of assets banks are required to hold. Some central banks also adjusted the remuneration rate, or the rate the central bank uses to pay interest on required and excess reserves. Some banks also changed compliance requirements, or the types of assets that could be counted as reserves.
Lending operations. Central banks adjusted lending facilities to maintain liquidity, either by expanding existing lending facilities or by creating new programs, which accounted for 60% of lending operations. In some cases, policies were targeted to specific financial market segments, particularly banks and small and medium-sized enterprises.
Asset purchases. Central banks in advanced economies used targeted and non-targeted lending operations to support monetary policies and maintain liquidity in the financial system. These goals were accomplished by increasing the size of existing programs and by lengthening the maturities of loans. Central banks in emerging economies expanded their existing liquidity facilities by lowering interest rates, broadening the types of eligible collateral, and increasing the number and types of eligible counterparties. The main difference between existing and new lending policies was that a large share of the new facilities targeted the private sector, including lending measures to support the flow of credit to households and non-financial corporations. In advanced economies about 40% of asset purchase programs were new facilities, while the share of new programs in emerging economies accounted for over 90%. In addition, asset purchases were split nearly evenly between public and private assets in advanced economies
Foreign exchange. The Federal Reserve implemented foreign exchange swaps initially with five countries (Canada, Euro area, Japan, UK, Switzerland),
followed by swap lines extended to nine other countries (Australia, Brazil, Korea, to relieve pressure in the dollar funding market.
Throughout the early stages of the economic crisis, central banks served as lenders of last resort through large purchases of government debt and as the buyers or lenders of last resort for private
78 Countercyclical capital buffers require banks to increase their capital buffers during periods of rapid growth in assets (when they are making a lot of loans), to ensure they have sufficient capital to absorb losses during a recession.
Countercyclical Capital Buffers, Bank for International Settlements, April 3, 2020. https://www.bis.org/bcbs/ccyb/.
79 Arnold, Martin, “Regulators Free up $500bn Capital for Lenders to Fight Virus Storm,” Financial Times, April 7, 2020. https://www.ft.com/content/9a677506-a44e-4f69-b852-4f34018bc45f.
80 Lessons Learnt From the COVID-19 Pandemic From a Financial Stability Perspective: Interim Report, Financial Stability Board, July 13, 2021, p. 9.
sector securities, in many cases engaging in activities that previously had been considered off-limits.81 As a result of these activities, the BIS argued that central banks effectively managed the initial liquidity crisis, the first of three phases often identified with financial crises. The second and third phases, insolvency and recovery, were also navigated successfully, but could still become more challenging the longer the pandemic-related economic crisis persists. Capital buffers were raised after the 2008-2009 financial crisis to assist banks in absorbing losses and staying solvent during financial crises. Some governments directed banks to freeze dividend payments and halt pay bonuses. The Financial Stability Board (FSB) argued in its July 13, 2021, report to the G-20 Finance Ministers and Governors that the monetary and fiscal actions taken by central banks and national governments, respectively, in combination with regulatory and
supervisory measures adopted following the 2008-2009 global financial crisis effectively contained the impact of the crisis, supported the functioning of the global financial system, and facilitated funding to the real economy.82
Since the beginning of the pandemic, central banks often adopted similar policies, although not always in unison. Most central banks followed the Federal Reserve in cutting interest rates as one of their main policy tools to support economic activity; the ECB (Euro Area) and Japan are notable exceptions, since they had reduced their main interest rates to zero prior to the economic recession. The low interest rates had an additional, although not necessarily intended, impact on currency markets by reducing arbitrage opportunities and, thereby, reducing volatility in
exchange rates.83 According to some analysts, the period through mid-summer 2021 experienced the longest period on record of low volatility between the dollar and the euro.
Table 5. Selected Central Bank and Prudential Measures to Address COVID-19
Advanced Economies
81 For a review of monetary policies of the Federal Reserve, the ECB, the Bank of Japan, and the Bank of England, see Haas, Jacob, Christopher J. Neely, William B. Emmons, Responses of International Central Banks to the COVID-19 Crisis, Federal Reserve Bank of St. Louis Review, Fourth Quarter 2020.
82 Lessons Learnt From the COVID-19 Pandemic, p. 10.
83 Duguid, Kate and Tommy Stubbington, Central Bank Sync Puts Foreign Exchange Market to Sleep, Financial Times, September 21, 2021.
Middle East and Asia
Tool type Measure AE DZ IL KW MA SA TR ZA
Interest Policy Rate cut X X X X X X X X
Lending
operations Liquidity provision X X X X X X X
Targeted lending X X X X X
Asset
purchases Government
bonds X X X
Corporate paper
Corporate bonds X
Other Foreign
exchange US dollar swap line
Swaps X
Spot intervention X
Reserve
policy Remuneration X
Required Ratio X X X
Compliance Emerging Asia
Tool type Measure CN HK ID IN KR MY PH SG TH VN
Interest Policy Rate cut X X X X X X X X X
Lending
operations Liquidity provision X X X X X X X
Targeted lending X X X X X X X
Asset
purchases Government
bonds X X X X X
Corporate paper X
Corporate bonds X X
Other Foreign
exchange US dollar swap line X X
Swaps X X X
Spot intervention X X
Reserve
policy Remuneration X
Required Ratio X X X X
Compliance X X
Latin America Eastern Europe
Tool type Measure AR BR CL CO MX PE CZ HU PL RO
Interest Policy Rate cut X X X X X X X X X X
Lending
operations Liquidity provision X X X X X X X X X
Targeted lending X X X X X X
Asset
purchases Government
bonds X X X X X
Corporate paper
Corporate bonds X
Other X X X
Foreign
exchange US dollar swap line X X
Swaps X X X X X X
Spot intervention X X
Reserve
policy Remuneration X X X X
Required Ratio X X X X X X
Compliance X X X
Source: Cantu, Carlos, Paolo Cavalino, Fiorella De Fiore, and James Yetnam, A Global Database of Central Banks’
Monetary Responses to COVID-19, BIS Working Papers No. 934, Bank for International Settlements, March 2021, p. 5.
Notes: AE: United Arab Emirates; AR: Argentina; AU: Australia; BR: Brazil; CA: Canada; CH: Switzerland; CL:
Chile; CN: China; CO: Colombia; CZ: Czech Republic; DK: Denmark; DZ: Algeria; EA: Euro Area; GB: Great Britain; HK: Hong Kong; HU: Hungary; ID: Indonesia; IL: Israel; IN: India; JP: Japan; KR: South Korea; KW:
Kuwait; MA: Morocco; MY: Malaysia; MX: Mexico; NO: Norway; NZ: New Zealand; PE: Peru; PH: the
Philippines; PL: Poland; RO: Romania SG: Singapore; SA: Saudi Arabia; SE: Sweden; TH: Thailand; TR: Turkey; US:
United States; VN: Vietnam; ZA: South Africa;