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How Global Central Banks are Responding to COVID-19, in One Chart

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Central Bank Policy COVID-19

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How Global Central Banks are Responding to COVID-19

When times get tough, central banks typically act as the first line of defense.

However, modern economies are incredibly complex—and calamities like the 2008 financial crisis have already pushed traditional policy tools to their limits. In response, some central banks have turned to newer, more unconventional strategies such as quantitative easing and negative interest rates to do their work.

In response to the COVID-19 pandemic, central banks are once again taking decisive action. To help us understand what’s being done, today’s infographic uses data from the International Monetary Fund (IMF) to compare the policy responses of 29 systemically important economies.

The Central Bank Toolkit

To begin, here are brief descriptions of each policy, which the IMF sorts into four categories:

1. Monetary Policies

Policies designed to control the money supply and promote stable economic growth.

Policy NameIntended Effect
Policy rate cutsStimulates economic activity by decreasing the cost of borrowing
Central bank liquidity supportProvides distressed markets with additional liquidity, often in the form of loans
Central bank swap linesAgreements between the U.S. Fed and foreign central banks to enhance the provision of U.S. dollar liquidity
Central bank asset purchase schemesUses newly-created currency to buy large quantities of financial assets, such as government bonds. This increases the money supply and decreases longer-term rates

2. External Policies

Policies designed to mitigate the effects of external economic shocks.

Policy NameIntended Effect
Foreign currency interventionStabilizes the national currency by intervening in the foreign exchange market
Capital flow measuresRestrictions, such as tariffs and volume limits, on the flow of foreign capital in and out of a country

3. Financial Policies for Banks

Policies designed to support the banking system in times of distress.

Policy NameIntended Effect
Easing of the countercyclical capital bufferA reduction in the amount of liquid assets required to protect banks against cyclical risks
Easing of systemic risk or domestic capital bufferA reduction in the amount of liquid assets required to protect banks against unforeseen risks
Use of capital buffersAllows banks to use their capital buffers to enhance relief measures
Use of liquidity buffersAllows banks to use their liquidity buffers to meet unexpected cash flow needs
Adjustments to loan loss provision requirementsThe level of provisions required to protect banks against borrower defaults are eased

4. Financial Policies for Borrowers

Policies designed to improve access to capital as well as provide relief for borrowers.

Policy NameIntended Effect
State loans or credit guaranteesEnsures businesses of all sizes have adequate access to capital
Restructuring of loan terms or moratorium on paymentsProvides borrowers with financial assistance by altering terms or deferring payments

Putting Policies Into Practice

Let’s take a closer look at how these policy tools are being applied in the real world, particularly in the context of how central banks are battling the effects of the COVID-19 pandemic.

1. Monetary Policies

So far, many central banks have enacted expansionary monetary policies to boost slowing economies throughout the pandemic.

One widely used tool has been policy rate cuts, or cuts to interest rates. The theory behind rate cuts is relatively straightforward—a central bank places downward pressure on short-term interest rates, decreasing the overall cost of borrowing. This ideally stimulates business investment and consumer spending.

If short-term rates are already near zero, reducing them further may have little to no effect. For this reason, central banks have leaned on asset purchase schemes (quantitative easing) to place downward pressure on longer-term rates. This policy has been a cornerstone of the U.S. Federal Reserve’s (Fed) COVID-19 response, in which newly-created currency is used to buy hundreds of billions of dollars of assets such as government bonds.

When the media says the Fed is “printing money”, this is what they’re actually referring to.

2. External Policies

External policies were less relied upon by the systemically important central banks covered in today’s graphic.

That’s because foreign currency interventions, central bank operations designed to influence exchange rates, are typically used by developing economies only. This is likely due to the higher exchange rate volatility experienced by these types of economies.

For example, as investors flee emerging markets, Brazil has seen its exchange rate (BRL/USD) tumble 30% this year.

In an attempt to prevent further depreciation, the Central Bank of Brazil has used its foreign currency reserves to increase the supply of USD in the open market. These measures include purchases of $8.8B in USD-denominated Brazilian government bonds.

3. Financial Policies for Banks

Central banks are often tasked with regulating the commercial banking industry, meaning they have the authority to ease restrictions during economic crises.

One option is to ease the countercyclical capital buffer. During periods of economic growth (and increased lending), banks must accumulate reserves as a safety net for when the economy eventually contracts. Easing this restriction can allow them to increase their lending capacity.

Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties.

—Andrea Enria, Chair of the ECB Supervisory Board

The European Central Bank (ECB) is a large proponent of these policies. In March, it also allowed its supervised banks to make use of their liquidity buffers—liquid assets held by a bank to protect against unexpected cash flow needs.

4. Financial Policies for Borrowers

Borrowers have also received significant support. In the U.S., government-sponsored mortgage companies Fannie Mae and Freddie Mac have announced several COVID-19 relief measures:

  • Deferred payments for 12 months
  • Late fees waived
  • Suspended foreclosures and evictions for 60 days

The U.S. Fed has also created a number of facilities to support the flow of credit, including:

  • Primary Market Corporate Credit Facility: Purchasing bonds directly from highly-rated corporations to help them sustain their operations.
  • Main Street Lending: Purchasing new or expanded loans from small and mid-sized businesses. Businesses with up to 15,000 employees or up to $5B in annual revenue are eligible.
  • Municipal Liquidity Facility: Purchasing short-term debt directly from state and municipal governments. Counties with at least 500,000 residents and cities with at least 250,000 residents are eligible.

Longer-term Implications

Central bank responses to COVID-19 have been wide-reaching, to say the least. Yet, some of these policies come at the cost of burgeoning debt-levels, and critics are alarmed.

In Europe, the ECB has come under scrutiny for its asset purchases since 2015. A ruling from Germany’s highest court labeled the program illegal, claiming it disadvantages German taxpayers (Germany makes larger contributions to the ECB than other member states). This ruling is not concerned with pandemic-related asset purchases, but it does present implications for future use.

The U.S. Fed, which runs a similar program, has seen its balance sheet swell to nearly $7 trillion since the outbreak. Implications include a growing reliance on the Fed to fund government programs, and the high difficulty associated with safely reducing these holdings.

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3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Valuations are much lower than they were during the dot-com bubble, but what else sets the current AI enthusiasm apart?

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Two bubbles sized according to the forward p/e ratio of the Nasdaq 100 Index during the dot-com bubble (60.1X) and the current AI Enthusiasm (26.4x).

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The following content is sponsored by New York Life Investments

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Artificial intelligence, like the internet during the dot-com bubble, is getting a lot of attention these days. In the second quarter of 2023, 177 S&P 500 companies mentioned “AI” during their earnings call, nearly triple the five-year average.

Not only that, companies that mentioned “AI” saw their stock price rise 13.3% from December 2022 to September 2023, compared to 1.5% for those that didn’t.

In this graphic from New York Life Investments, we look at current market conditions to find out if AI could be the next dot-com bubble.

Comparing the Dot-Com Bubble to Today

In the late 1990s, frenzied optimism for internet-related stocks led to a rapid rise in valuations and an eventual market crash in the early 2000s. By the time the market hit rock bottom, the tech-heavy Nasdaq 100 Index had dropped 82% from its peak.

The growing enthusiasm for AI has some concerned that it could be the next dot-com bubble. But here are three reasons that the current environment is different.

1. Valuations Are Lower

Stock valuations are much lower than they were at the peak of the dot-com bubble. For example, the forward price-to-earnings ratio of the Nasdaq 100 is significantly lower than it was in 2000.

DateForward P/E Ratio
March 200060.1x
November 202326.4x

Source: CNBC, Barron’s

Lower valuations are an indication that investors are putting more emphasis on earnings and stocks are less at risk of being overvalued.

2. Investors Are More Hesitant

During the dot-com bubble, flows to equity funds increased by 76% from 1999 to 2000.

YearCombined ETF and Mutual Fund Flows to Equity Funds
1997$231B
1998$163B
1999$200B
2000$352B
2001$63B
2002$14B

In contrast, equity fund flows have been negative in 2022 and 2023.

YearCombined ETF and Mutual Fund Flows to Equity Funds
2021$295B
2022-$54B
2023*-$137B

Source: Investment Company Institute
*2023 data is from January to September.

Based on fund flows, investors appear hesitant of stocks, rather than overly exuberant.

3. Companies Are More Established

Leading up to the internet bubble, the number of technology IPOs increased substantially.

YearNumber of Technology IPOsMedian Age
19971748
19981137
19993704
20002615
2001249
2002209

Many of these companies were relatively new and, at the peak of the bubble in 2000, only 14% of them were profitable.

In recent years, there have been far fewer tech IPOs as companies wait for more positive market conditions. And those that have gone public, the median age is much higher.

YearNumber of Technology IPOsMedian Age
20204812
202112612
2022615

Ultimately, many of the companies benefitting from AI are established companies that are already publicly traded. New, unproven companies are much less common in public markets.

Navigating Modern Tech Amid Dot-Com Bubble Worries

Valuations, equity flows, and the shortage of tech IPOs all suggest that AI isn’t shaping up to be the next dot-com bubble.

However, risk is still present in the market. For instance, only 33% of tech companies that went public in 2022 were profitable. Investors can help manage their risk by keeping a diversified portfolio rather than choosing individual stocks.

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