Markets

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

Published

3 months ago

May 20, 2020

Marcus Lu

Central Bank Policy COVID-19

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 Name	Intended Effect
Policy rate cuts	Stimulates economic activity by decreasing the cost of borrowing
Central bank liquidity support	Provides distressed markets with additional liquidity, often in the form of loans
Central bank swap lines	Agreements between the U.S. Fed and foreign central banks to enhance the provision of U.S. dollar liquidity
Central bank asset purchase schemes	Uses 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 Name	Intended Effect
Foreign currency intervention	Stabilizes the national currency by intervening in the foreign exchange market
Capital flow measures	Restrictions, 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 Name	Intended Effect
Easing of the countercyclical capital buffer	A reduction in the amount of liquid assets required to protect banks against cyclical risks
Easing of systemic risk or domestic capital buffer	A reduction in the amount of liquid assets required to protect banks against unforeseen risks
Use of capital buffers	Allows banks to use their capital buffers to enhance relief measures
Use of liquidity buffers	Allows banks to use their liquidity buffers to meet unexpected cash flow needs
Adjustments to loan loss provision requirements	The 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 Name	Intended Effect
State loans or credit guarantees	Ensures businesses of all sizes have adequate access to capital
Restructuring of loan terms or moratorium on payments	Provides 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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Markets

How the S&P 500 Performed During Major Market Crashes

How does the COVID-19 market crash compare to previous financial crises? We navigate different contextual factors impacting crashes.

Published

1 day ago

August 5, 2020

Dorothy Neufeld

How the S&P 500 Performed During Major Market Crashes

Like spectacular market peaks, market crashes have been a persistent feature of the S&P 500 throughout time.

Still, the forces underpinning each rise and fall are often less clear. Take the COVID-19 crash, for example. Despite lagging economic growth and historic unemployment levels, the S&P 500 bounced back 47% in just five months, in a stunning reversal.

Drawing data from Macrotrends, the above infographic compares six historic market crashes—examining the length of their recoveries and the contextual factors influencing their durations.

The Big Picture

How does the current COVID-19 crash of 2020 stack up against previous market crashes?

Title	Start — End Date	Duration (Trading Days)	% Drop
Black Tuesday / Great Crash*	Sep 16, 1929 — Sept 22, 1954	300 months (7,256 days)	-86%
Nixon Shock / OPEC Oil Embargo	Jan 11, 1973 — Jul 17, 1980	90 months (1,899 days)	-48%
Black Monday**	Oct 13, 1987 — May 15, 1989	19 months (402 days)	-29%
Dot Com Bubble	Mar 24, 2000 — May 30, 2007	86 months (1,808 days)	-49%
Global Financial Crisis	Oct 9, 2007 — Mar 28, 2013	65 months (1,379 days)	-57%
COVID-19 Crash***	Feb 19, 2020 — Ongoing	5 months+ (117+ days)	-34%

Price returns, based on nominal prices
*Black Tuesday occurred about a month after the market peak on Oct 29, 1929
**The market hit a peak on Oct 13th, prior to Black Monday on Oct 19,1987
***As of market close Aug 4, 2020

By far, the longest recovery of this list followed the devastation of Black Tuesday, while the shortest was Black Monday of 1987—where it took 19 months for the market to fully recover.

Let’s take a closer look at each market crash to navigate the economic climate at the time.

After the Fall

What were some factors that can help provide context into the crash?

1929: Black Tuesday / Great Crash

Following Black Tuesday in 1929, the U.S. stock market took 7,256 days—equal to about 25 years—to fully recover from peak to peak. In response to the market crisis, a coalition of banks bought blocks of shares, but with negligible effects. In turn, investors fled the market.

Meanwhile, the Federal Reserve Board rose the discount lending rate to 6%. As a result, borrowing costs climbed for consumers, businesses, and the central banks themselves. The tightening of rates led to unintended consequences, with the economy capitulating into the Great Depression. Of course, factors that contributed to its prolonged recovery have been debated, but these are just a few of the actions that had implications at the time.

1973: Nixon Shock / OPEC Oil Embargo

The Nixon Shock corresponded with a series of economic measures in response to high inflation. Soaring inflation devastated stocks, consuming real returns on capital. Around the same time, the oil embargo also occurred, with OPEC member countries halting oil exports to the U.S. and its allies, causing a severe spike in oil prices. It took seven years for the S&P 500 to return to its previous peak.

1987: Black Monday

While the exact cause of the 1987 crash has been debated, key factors include both the advent of computerized trading systems and overvalued markets.

To curtail the impact of the crash, former Federal Reserve chairman Alan Greenspan aggressively slashed interest rates, repeatedly promising to take great lengths to stabilize the market. The S&P took under two years to recover.

2000: Dot Com Bubble

To curb the stratospheric rise of U.S. tech stocks, the Federal Reserve raised interest rates five times in eight months, sending the markets into a tailspin. Virtually $5 trillion in market value evaporated.

However, a number of well-known companies survived, including eBay and Amazon. At the time, Amazon’s stock price cratered from $107 to $11 while eBay lost 75% of its market value. Meanwhile, a number of Dot Com flops included Pets.com, WorldCom, and FreeInternet.com.

2007: Global Financial Crisis

Relaxed credit policies, the proliferation of subprime mortgages, credit default swaps, and commercial mortgage-backed securities were all factors behind the market turmoil of 2007. As banks carved out risky loans packaged in opaque tranches of debt, risk in the market accelerated.

Similar to 1987, the Federal Reserve initiated a number of rescue actions. Interest rates were brought down to historical levels and $498 billion in bailouts were injected into the financial system. Crisis-related bailouts extended to Fannie Mae and Freddie Mac, the Troubled Asset Relief Program (TARP), the Federal Housing Administration, and others.

2020: COVID-19 Crash

In 2020, historic fiscal stimulus measures along with trillions in Fed financing have factored heavily in its swift reversal. The result has been one of the steepest rallies in S&P 500 history.

At the same time, the economy is mirroring Great Depression-level unemployment numbers, reaching 14.7% in April 2020. In short, this starkly exposes the sharp disconnect between the markets and broader economy.

Bearing Witness

History offers many lessons, and in this case, a view into the shape of a post-coronavirus market recovery.

Although the stock market is likely rallying off Fed liquidity, investor optimism, and the promise of potential vaccines, it’s interesting to note that the trajectory of this crash in some ways resembles the initial rebound shown during the Great Depression—which means we may not be out of the woods quite yet.

As the S&P 500 edges 2% shy of its February peak, could the market post a hastened recovery—or is a protracted downturn in the cards?

This graphic has been inspired by this Reddit post.

Markets

Ranked: The Best and Worst Pension Plans, by Country

As the global population ages, pension reform is more important than ever. Here’s a breakdown of how key countries rank in terms of pension plans.

Published

5 days ago

August 1, 2020

Carmen Ang

Ranked: Countries with the Best and Worst Pension Plans

The global population is aging—by 2050, one in six people will be over the age of 65.

As our aging population nears retirement and gets closer to cashing in their pensions, countries need to ensure their pension systems can withstand the extra strain.

This graphic uses data from the Melbourne Mercer Global Pension Index (MMGPI) to showcase which countries are best equipped to support their older citizens, and which ones aren’t.

The Breakdown

Each country’s pension system has been shaped by its own economic and historical context. This makes it difficult to draw precise comparisons between countries—yet there are certain universal elements that typically lead to adequate and stable support for older citizens.

MMGPI organized these universal elements into three sub-indexes:

Adequacy: The base-level of income, as well as the design of a region’s private pension system.
Sustainability: The state pension age, the level of advanced funding from government, and the level of government debt.
Integrity: Regulations and governance put in place to protect plan members.

These three measures were used to rank the pension system of 37 different countries, representing over 63% of the world’s population.

Here’s how each country ranked:

Country	Overall Value	Adequacy	Sustainability	Integrity
Argentina	39.5	43.1	31.9	44.4
Australia	75.3	70.3	73.5	85.7
Austria	53.9	68.2	22.9	74.4
Brazil	55.9	71.8	27.7	69.8
Canada	69.2	70	61.8	78.2
Chile	68.7	59.4	71.7	79.2
China	48.7	60.5	36.7	46.5
Colombia	58.4	61.4	46	70.8
Denmark	80.3	77.5	82	82.2
Finland	73.6	73.2	60.7	92.3
France	60.2	79.1	41	56.8
Germany	66.1	78.3	44.9	76.4
Hong Kong	61.9	54.5	54.5	86.9
India	45.8	39.9	44.9	56.3
Indonesia	52.2	46.7	47.6	67.5
Ireland	67.3	81.5	44.6	76.3
Italy	52.2	67.4	19	74.5
Japan	48.3	54.6	32.2	60.8
Korea	49.8	47.5	52.6	49.6
Malaysia	60.6	50.5	60.5	76.9
Mexico	45.3	37.5	57.1	41.3
Netherlands	81	78.5	78.3	88.9
New Zealand	70.1	70.9	61.5	80.7
Norway	71.2	71.6	56.8	90.6
Peru	58.5	60	52.4	64.7
Philippines	43.7	39	55.5	34.7
Poland	57.4	62.5	45.3	66
Saudi Arabia	57.1	59.6	50.5	62.2
Singapore	70.8	73.8	59.7	81.4
South Africa	52.6	42.3	46	78.4
Spain	54.7	70	26.9	69.1
Sweden	72.3	67.5	72	80.2
Switzerland	66.7	57.6	65.4	83
Thailand	39.4	35.8	38.8	46.1
Turkey	42.2	42.6	27.1	62.8
UK	64.4	60	55.3	84
U.S.	60.6	58.8	62.9	60.4

The Importance of Sustainability

While all three sub-indexes are important to consider when ranking a country’s pension system, sustainability is particularly significant in the modern context. This is because our global population is increasingly skewing older, meaning an influx of people will soon be cashing in their retirement funds. As a consequence, countries need to ensure their pension systems are sustainable over the long-term.

There are several factors that affect a pension system’s sustainability, including a region’s private pension system, the state pension age, and the balance between workers and retirees.

The country with the most sustainable pension system is Denmark. Not only does the country have a strong basic pension plan—it also has a mandatory occupational scheme, which means employers are obligated by law to provide pension plans for their employees.

Adequacy versus Sustainability

Several countries scored high on adequacy but ranked low when it came to sustainability. Here’s a comparison of both measures, and how each country scored:

Ireland took first place for adequacy, but scored relatively low on the sustainability front at 27th place. This can be partly explained by Ireland’s low level of occupational coverage. The country also has a rapidly aging population, which skews the ratio of workers to retirees. By 2050, Ireland’s worker to retiree ratio is estimated to go from 5:1 to 2:1.

Similar to Ireland, Spain ranks high in adequacy but places extremely low in sustainability.

There are several possible explanations for this—while occupational pension schemes exist, they are optional and participation is low. Spain also has a low fertility rate, which means their worker-to-retiree ratio is expected to decrease.

Steps Towards a Better System

All countries have room for improvement—even the highest-ranking ones. Some general recommendations from MMGPI on how to build a better pension system include:

Increasing the age of retirement: Helps maintain a more balanced worker-to-retiree ratio.
Enforcing mandatory occupational schemes: Makes employers obligated to provide pension plans for their employees.
Limiting access to benefits: Prevents people from dipping into their savings preemptively, thus preserving funds until retirement.
Establishing strong pension assets to fund future liabilities: Ideally, these assets are more than 100% of a country’s GDP.

Pension systems across the globe are under an increasing amount of pressure. It’s time for countries to take a hard look at their pension systems to make sure they’re ready to support their aging population.