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6REVIEW OF MEASURES TAKEN BY THE BANK OF RUSSIA IN RESPONSE OF COVID-19 PANDEMIC CRISIS IN COMPARISON WITH THE CENTRAL BANKS FROM COUNTRIES WITH ADVANCED, EMERGING AND ISLAMIC ECONOMIES
This review observes measures undertaken by the Bank of Russia in comparison with the group of regulators of chosen countries in response of COVID-19 pandemic covering Monetary Policy, Financial stability and Supervision and Regulation implications. The review demonstrates that despite different types of economies, all central banks see their role in the economic stability support. Different ways of how they achieve their objectives did not change significantly measures that were undertaken jointly with governments. The commonalities of actions highlighted that quick and addressed measures taken by the financial regulators were decisive and successful.
Keywords
global central banking, monetary policy, financial stability, prudential supervision,
COVID-19 policy response
AUTHOR
Nadezhda V. Gromova,
DBA candidate SDA Bocconi Italy RANEPA, Faculty of Finance and Banking, Moscow 82 building 1, Vernadsky prospect, Moscow, 119571, Russia nvgromova.1973@gmail.com
1. Introduction
Economists discuss whether the COVID-19 pandemic is just an extraordinarily large recessionary shock or it is a sign of a Great Reallocation of capital and labour (Pagano, M. et al., 2020). The reason for this discussion lies deeply in differences in how particular industries suffered and succeeded from the lockdown consequences. Some of them were not resilient to social distant conditions whereas the others were capitalized and grew up thanks the new opportunities for sale. This global social crisis is underpinned by global spreading of human virus suppressed the business activity in general, reduced the economies and increased unemployment. More or less, all countries suffered from the shocks and there is no country with the economy which is immune from the negative consequences of COVID-19 (Chudik A. et al., 2020). The findings highlighted the need of early and timely implemented internal and well-coordinated cross-country policy response.
The main COVID-19 shocks include (Maliszewskaya, M. et al., 2020):
1. The first shock is a drop in employment over the globe
2. The second shock is in raising of international trade costs across all goods and services and which is explained and driven by additional inspections, reduced hours of operations, road closures, border closures, increases in transport costs etc.
3. The third shock is a sharp decrease in the international tourism and businesses that are connected with it: mass transport, restaurants and recreational activities. Some services and productions are able to continue their work using social distance, but some of them tend to suffer more than others: tourism, long-distance passenger transport, hotels, cafes and restaurants, education.
4. Drop of general spending of households provokes the reduction of corporate and entrepreneurships' income and GDP.
It is believed that Central Banks should be independent on political factors and ministries to stay able to promote chosen MP and to achieve their targets. Changes in global economy provoked by the COVID-19 showed that all actions and all decisions made by the financial authorities should be inline with the strategy chosen by governments.
2. Methods and Materials
The main theoretical research methods that were used in this review were A) induction and B) analysis. The main empirical research methods were A) observation and B) comparison.
To understand which central bank can be chosen for the comparison with the Bank of Russia, 24 countries from 3 groups of economies (advanced, emerging and Islamic) were analysed.
To choose countries for the comparison the following factors were taken into account:
- the mandate of the chosen Central Banks should cover no less than 3 responsibilities: Monetary Policy, Financial Stability and Prudential Supervision. This allows to assume that they have similar structure of relationships with government, Ministry of Finance and other authorities and therefore similar managerial influence on economy;
- each Central Bank presents different types of economies, such as Islamic Economy or Open Economy, but central banks in these countries should provide conventional banking, not only Islamic banking;
- the information about their policies and COVID-19 response should be available for public on the open sources in the internet.
Finally for the comparison with the Bank of Russia three Central Banks were chosen: Bank of England (BoE), Monetary Authority of Singapore (MAS) and Central Bank of the UAE (UAECB).
The comparative analysis of national monetary policies that the chosen central banks normally follow was undertaken. For this purpose the legislation of countries and the internet sites of these financial authorities were observed. From this observation differences and similarities in policies of Central Banks were disclosed.
To understand which measures were undertaken by financial authorities in response of COVID-19 pandemic the information from the open resources such as International Monetary Fund, the regulators' sites, OECD was observed and compared with measures taken by the Bank of Russia. To understand how deeply measures announced by the regulators depended on decisions made by the governments the brief analysis of fiscal supportive measures undertaken by the governments and ministries of 3 countries was done using open sources of information: the internet sites of governments, statistical authorities, Ministries of Finance.
To discover how the regulators controlled the stability of the financial systems and continued to provide qualitative prudential supervision the comparative analysis of legislation and measures taken in this field was done. For this purpose the information from the sites of the Central Banks was gathered and compared.
3. Results
The comparative analysis of Monetary Policy objectives the Central Banks follow showed similarities (the BoE, the CBR and MAS set the inflation rate target and follow it managing the liquidity supply) and differences (the UAECB does not target the inflation rate) in approaches. While the BoE and the CBR set the Bank Rate, the MAS and the UAECB
are focused on national currency stability using currency basket and longstanding narrow spread in rates respectively. But all central banks use a range of liquidity tools managing quantity of money in the economy.
The main characteristics of the COVID-19 pandemic-based crisis reflect the slowdown of the global economy due to several shocks including sharp decrease in employment, household spending and significant reduction of the particular industries production that cannot function in lockdown circumstances and distant terms (Table 4). All measures undertaken by the governments and the regulators were similar and focused on interest rates reduction, widening of the range of liquidity supply tools, reserves requirements reduction and providing national currency stability.
The main findings from the analysis demonstrate that:
- despite the differences in economies' sizes, approaches and main objectives of the regulators, actions undertaken by central banks were similar to each other and all forces were well-coordinated with governments aiming to achieve a maximum effect and to boost the economies;
- the exact price for quantitative and qualitative easing is not yet identified due to the continuing pandemic over the globe;
- even though central banks are independent in their policies and strategies, they are unable to separate themselves from social and political life of the countries they operate.
4. Discussions
4.1. Underpinning the choice of banks for the analysis
The analysis of Group 1 mandates' framework (Table 1) showed that all banks from this group are responsible for monetary policy and none of them regulates security market.
table 1.
Group 1 Australia Canada Japan Sweden USA UK EU Switzerland
Monetary Policy Yes Yes Yes Yes Yes Yes Yes Yes
Payment System Yes Partially Yes Yes Yes Yes Yes Yes
Notes Printing Partially Partially Yes Yes Yes Yes Partially Yes
Financial Stability Yes Partially Yes Partially Yes Yes No Yes
Prudential supervision No No No No Yes Yes Partially No
Resolution No No No No No Yes No No
Market regulation No No No No No No No No
Sometimes central banks can share responsibilities with other regulating organizations:
1. The Bank of Canada itself is a member of Payment Canada: there are two payment systems in Canada: Large-Value transfer system (LVTS) and Automated Clearing Settlement System (ACSS). Both of them belong to Payment Canada (created by the Act of Parliament in 1980).
2. Reserve Bank of Australia oversees the turnover of cash but prints money through Note Printing Australia Limited. In Canada notes printing is a responsibility of the Bank of Canada, excluding coins. For those Royal Canadian Mint exists. In Euro Union ECB also only oversees operations, bat national authorities make a physical issue.
3. ECB is not focused on the financial stability. National authorities should lead the policies. CBs of Australia, Japan, UK, USA and Switzerland are fully responsible for implementation of principles of Financial stability whereas the Bank of Canada should act in collaboration with four regulating institutions: FISC, SRSC, SAC and CFSRG. Sweden Sveri-ges Bank acts together with independent Financial Stability Council.
4. Prudential supervision is fully covered by the mandate of the BoE. FRS and ECB
cover prudential regulation partially, only for large banks. For smaller banks other
institutions should react. Resolution is covered only by the mandate of the BoE.
5. All CBs are responsible for Monetary Policy, but in accordance with the Bank of Canada Act (1985) the Minister of Finance can issue written instructions for the Bank of Canada to change its policy, but this had never happened in the history and the Governor is enabled to set monetary policy alone.
The analysis of the Group 2 mandates' framework (Table 2) shows there are two countries where regulators are responsible for all the items including market regulation: Russia and Singapore. In three countries (Brazil, Mexico and India) CBs share their responsibilities and act in collaboration with other financial regulating institutions concerning Financial stability and in Hong Kong objectives for the Monetary Authority are determined by the Financial Secretary.
table 2.
Group 2 Russia Singapore Hong Kong SA Brazil Mexico China India
Payment System Yes Yes Yes Yes Yes Yes Yes Yes
Monetary Policy Yes Yes Partly Yes Yes Yes Yes Yes
Notes Printing Yes Yes Partly Yes Yes Yes Yes Yes
Prudential supervision Yes Yes Yes Yes Yes Partly No Yes
Financial Stability Yes Yes Yes Yes Partly Yes Yes Partly
Resolution Yes Yes Yes Partly Yes No No Yes
Market regulation Yes Yes Yes No No No Partly No
The analysis of the Group 3 countries (Table 3) demonstrates that:
1. All CBs are responsible for development of payment system, banknotes printing and MP implementation.
2. Financial stability and Prudential supervision are mostly rules-based (Kuwait, Qatar, Oman, Libya, Morocco) or poor (Iraq). In Saudi Arabia Prudential supervision is a responsibility of SAMA. The UAECB is responsible for Supervision, but not in Dubai and Abu Dhabi.
3.Resolution regime is absent in all countries except Oman, where CB established an internal Bank Resolution Committee, and Saudi Arabi where the CB's mandate covers this resolution implicitly.
4. Mostly banks from the Group 3 have an objective of their national currency stability, this allows them to control financial and securities markets partially.
table 3.
Group 3 Kuwait Qatar Oman Morocco Libia Iraq Saudi Arabia UAE
Monetary Policy Yes Yes, MPC Yes Yes Yes, MPC Yes Yes, MPC Yes
Financial Stability Yes, rules-based Yes, FSC Yes, FSC Yes, FSC Yes Yes, poor Partly, implicitly Yes
Prudential Supervision Yes, rules-based Yes Yes Yes Yes Yes, poor No Partly
Resolution No regime No regime Yes, Bank Resolution Committee No regime Yes, poor No No regime No regime
Payment system Yes Yes Yes Yes Yes Yes Yes Yes
Notes printing Yes Yes Yes Yes Yes No Yes Yes
Market regulation Partly No No No No Partly Yes Partly
After the mandate's framework analysis, the following countries were chosen:
Group 1: USA and UK.
Group 2: Russia, Singapore and South Africa.
Group 3: UAE, Kuwait, Qatar, Oman.
USA was excluded due to particular situation in the country in terms of election period and political influence on decision-making process. South Africa, Kuwait, Qatar and Oman were excluded due to poor informing sites.
It was concluded to take for the analysis of the COVID-19 response policies of four regulators: Banks of England, Monetary Authority of Singapore, Central Bank of Russia and Central Bank of the UAE.
4.2. The COVID-19 pandemic effect
The COVID-19 pandemic effect on the economies of chosen countries demonstrates commonalities in GDP's significant drop, increase in unemployment and people's spending, the general slowdown of economies. All countries had suffered from exports and imports reduction. Commodity countries (Russian Federation and the United Arab Emirates) suffered from drop in commodity exports due to oil prices fall. The production was also reduced dramatically due to lockdowns:
TABLE 4. - THE COVID-19 PANDEMIC EFFECT (IMF, 2021)
_UK_
1. Two lockdowns in 2020, further restrictions took place since January 2021.
2. Population is 67,6 million. The number of deaths in 2020 reached 0,11% amounted 72 178 people (gov.uk, 2020). Case mortality rate is 128,2 per 100 000 population.
3. Sharp economy contraction in the 1st and 2nd quarters (-15,8%). Annual GDP dropped by 9,8%. Manufacturing, services reduced by 60% (OECD, 2020).
4. Positive inflation rate 1.2%
5. Unemployment is 7.4%. The highest was 11,9% in 1984, the lowest level was fixed in 1973 at 3,4%.
6. Annual exports decreased by 4,6% and imports dropped by 8,4% on annual basis to May 2020 (Office for National Statistics, 2020)_
_uae_
1. The economy was suppressed by two shocks: oil prices drop and the pandemic
2. The lockdown in 2020 lasted from the end of February till 24 April 2020 when gradual reopening of the economy started.
3. Population is 11,08 million. The number of deaths in 2020 reached 0,01% amounted 1073 people (Johns Hopkins University, 2021).
4. GDP contracted by 6,6% in 2020 comparatively to
2019.
5. Negative inflation rate -2,07%
6. Unemployment is 2,45%. The lowest was in 2016 at 1,64%, the highest was in 2004 at 3,18% (sta-tista.com).
7. Export sales decreased almost twice in May than recovered in September
2020. Total UAE trade balance deficit recorded USD 10,7 bln in September 2020.
_Russia_
1. The economy was affected by two shocks: oil prices drop and the pandemic.
2. Population is 146,8 million. The number of deaths is 89463 (World Health Organization, 2021).
3. One lockdown in 2020: March-May.
4. GDP dropped by 3,1% in 2020.
5. Positive inflation rate at 4,91%.
6. Unemployment is 5,6%. The lowest was in 2019 at 4,6%, the highest was in 1998 at 13%.
7. Gross exports and imports decreased to 84,7% comparatively to 2019. Exports dropped by 21% due to oil sales reduction.
_Singapore_
1. The lockdown was called Singapore Circuit Breaker (SCB). It lasted from 7 April till 1 June 2020.
2. Population is 5,77 million. The number of deaths in 2020 was 29 which is 0,000005% of total population. The lowest in the world case fatality rate 0,05 (Johns Hopkins University, 2021).
3. Real GDP in 2020 dropped by 5,4% (Department of Statistics of Singapore, 2021).
4. Negative inflation rate -0,4%
5. Negative CIR -0,3%
6. Unemployment increased by 0,3% to 2,6%. The lowest at 1,4% was in 1997, the highest 6,3% was in 1982.
7. In 2019 total gross exports and imports was S$ 1 022.2 bln (200,2% GDP) and decreased in 2020 by 5,2% to S$ 969.1 bn.
4.3. Understanding the role of regulator as a provider of policies and supervision
4.3.1. Monetary Policy approaches and tools
The BoE understands MP as an action that it takes to influence:
- how much money is in the circulation;
- how much it costs to borrow.
There are two main tools that the BoE uses for those purposes: by setting the interest Bank Rate and by quantitative easing. The target of the inflation rate at 2% was set by the Government of the UK and the BoE targets and applies its forces to keep it at this level. The Office for National Statistics (ONS) on a monthly basis calculates consumer price index which measures the inflation.
The BoE's internal Monetary Policy Committee (MPC) consists of 5 internal members from the BoE and 4 external members appointed directly by the Chancellor. MPC decides what action can be taken to follow Monetary Policy.
Monetary Policy framework in Singapore is focused on the trade-weighted exchange rate. This is explained by the open and small-sized economy where the gross exports and imports of goods is more than 200% of GDP (McCallum, 2006). The Open-Economy Tri-lemma sounds that a country with an open economy cannot successfully manage exchange and domestic interest rate together (MAS, 2013). MAS sets a path for the trade-weighted exchange rate of Singaporean $ (SSNEER) within a policy band which is medium-term and
based on projections of economy developments. To manage liquidity MAS has Domestic Markets Management Department which every day conducts money market operations. MAS monitors and targets the Core Inflation Rate (CIR) announcing that on average CIR should be less than 2%. CIR is calculated as a CPI-all items inflation excluding costs of accommodation and private road transport costs.
The Central Bank of Russia (CBR) understands its role in monetary policy as maintaining price stability which is sustainably low inflation (www.cbr.ru). CBR targets an inflation rate close to 4% that means inflation may fluctuate around the target. In case of a significant deviation from the target, the CBR defines the reason for that and its possible duration aiming to make the best decision how to influence the economy. CBR does not focus on the national currency exchange rate and does not manage it. But at the same time, it means that CBR can conduct foreign currency transactions in the market if it is necessary for financial stability and in frame of Russia's fiscal rule (CBR, 2014). The main instrument how CBR implements its Monetary Policy is the Key Interest Rate. Changing the rate CBR makes interest rates in the economy to move. Besides that, CBR has a wide range of liquidity supply tools through which it achieves a comfortable level of liquidity in the financial system.
The United Arabian Emirates Central Bank (UAECB) aims to achieve monetary stability through managing the stability of national currency AED (Wong, 2019). The exchange rate peg is longstanding and has been in place since 1980 at the rates 3.6720/3.6730 to buy or sell respectively. As the UAECB is mandated to provide both the Conventional Banking and the Islamic Banking Principles, the wide range of liquidity supply and absorption tools includes: Certificates of Deposit (CDs) and Islamic Certificates of Deposit (ICDs), Repo and Early Redemption of CDs/ICDs, USD/AED Swap Facility, Interim Marginal Lending Facility (IMLF), Collateralized Murabaha Facility (CMF). As a benchmark for market the EIBOR is used - an interest rate at which the Panel Banks can access AED funding (Regulations regarding Emirates Interbank Offered Rate Submission, 2018). The UAECB does not target, but monitors several measurements of the inflation rate: CPI (a headline inflation), CPI excluding rents, CPI excluding food, Tradable VS Non-tradable CPI, Trimmed CPI and Volatility-weighted inflation. This helps to make the reason for fluctuations transparent.
The analysis of the inflation rates for the latest 10 years highlighted the common inflation trends for the UK and Singapore (Picture 1). Within the latest 3 years the downgrading trend of inflation can be observed. The fluctuations in Russia and in the UAE were particularly volatile and trends repeated each other due to the commodity structure of the economy. The UK and Singaporean trends were also similar to each other.
Inflation rates and targets
1
2010
UK Target
Singapore 2,82
— — — Singapore target
UAE 0,88
RF 8,8
— — — RF Target
2011 2012
3,8 2,6
5,25 4,58
0,88 0,66
6,1 6,6
2013 2014
2,3 1,5
2,36 1,03
1,1 2,35
6,5 11,4
2015 2016 0,4 1
-0,52 -0,53
4,07 1,62 12,9 5,4
2017 2018
2,6 2,3 2
0,58 0,44 2
1,97 3,07 3 4,3 4
2019 2020
1,7 1,2 22 0,57 -0,2 22 -1,93 -2,07 2,5 4,91 44
FIGURE 1.
4.3.2. Financial stability and prudential supervision.
The UK, Russian Federation, Singapore and the UAE are members of International Monetary Fund and FSAP programme. The UK, Russia and Singapore are also the members of the Financial Stability Board.
The BoE sees its role in implementing a range of mechanisms, policies and
frameworks to protect and enhance the stability of the financial system (Bank of England Act, 1998) through three steps:
- establishment of a baseline resilience level for the financial system (FS)
- to ensure the level of resilience is equal to possible shocks
- to enable the FS to absorb shocks.
The BoE has internal Financial Policy Committee (FPC). FPC powers and responsibilities have two sides: direction and recommendation.
Directive powers include setting:
- the CCyB rate for the UK
- sectoral capital requirements for UK firms
- a leverage ratio requirement
- loan-to-value (LTV) and debt-to-income limits for UK mortgages on owner-occupied properties
- LTV and interest cover ratio limits for UK mortgages on buy-to-let properties
Power of recommendation includes contribution of FPC to the design and calibration
of the banks' stress-testing framework which FPC works out alongside the Prudential Stability Committee.
The MAS sees its role in forming of the best organized and implemented mechanisms of prudential supervision and regulation for members of the financial market. Supervision means monitoring and assessment of the risk profile of financial market members, their financial strength, governance, risk-management, control procedures, regulatory compliance and business conduct. Regulation means the establishment of specific rules of behaviour for financial institutions. (Monetary Authority of Singapore, 2015). The Impact & Risk Model (Monetary Authority of Singapore, 2015) divides all banks into 4 Baskets and allows to reach proportionate supervision of financial institutions dependently on their Basket category. To manage the market MAS uses a range of communicative instruments: directions, directives and notices and circulars, which are strict requirements and guidelines and codes as more principles-based, public oriented and presenting best practices. MAS sets standards of capital adequacy and other principles of Basel Performs in Singapore, guides risk-management practices, regulates and integrates best practices of AML.
CBR is responsible for the Financial Stability in Russia in accordance with the Article 3 of the Federal Law "About the Central Bank of Russian Federation (the Bank of Russia)", CBR divides all risks the financial system can meet on two types: external (such as global crisis, fluctuations in oil and gas prices) and internal (bubbles in the particular domestic markets, loss of solvency by important financial institutions etc.). Macro-prudential policy is the main tool the CBR uses for maintaining the Financial Stability. The macro-prudential policy is mostly rules-based, not principal-based and includes capital adequacy and RWA requirements and DBR (since October 2019). The National Council for Financial Stability (NCFS) was established in 2013 which consists of officers from the Ministry of Finance, Ministry of Economic Development, the Deposit Insurance Agency and CBR and representatives of the Presidential Administration. To implement Financial Stability policies the CBR has an internal Financial Stability Department. FSD monitors systemic risks, elaborates and supervises policy tools and participates in the stress-testing of credit institutions, pension funds and systemically important insurance companies.
The UAECB sees the effective supervision and prudent reserve management as a way to promote financial stability, efficiency and resilience of the FS. The UAECB internal Financial Stability Department (FSD) identifies and monitors potential, current and future risks, forms macro-prudential policy and applies macro-prudential tools to reduce systemic risks to the FS. The latest IMF FSAP report of UAE was published in 2007 and counted some weaknesses in the area of Financial Stability. After the GFC the regulation and supervision in the UAE were upgraded significantly and covered:
- regulations in corporate governing,
- risk-management including all risks types
- regulations re capital adequacy which is inline with Basel III and requiring the
Components of the regulatory capital at the level of 7% for CET1 and 8,5% for Tier1
and 10,5% for Total Capital. In addition to the minimum CET1 banks should monitor the CCB of 2,5% of RWA (Central Bank of the UAE, 2018). The level of CCyB is required to be between 0 - 2,5% of RWA.
All responsibility for the liquidity risk management is applied at banks (Central Bank of the UAE, 2015). Quantitative regulations require banks to comply with the Eligible Liquid Ratio or Liquidity Cover Ratio and Net Stable Funding Ratio. Regulations regarded mortgage were adapted in 2013 and mandated the UAECB to set an LTV ratio and property characteristics for mortgages. The maximum Debt Burden Ratio (DBR) was set up at 50% of gross salary or regular income of the borrower.
Both the UK and Singapore have the Resolution Regime. The UAE does not have a resolution regime and it is not a member of FSB, but banks have a strict "must-do" list of actions to be undertaken to avoid failure.
4.3.3. The analysis of the COVID-19 policy responses taken by the governments and regulators in the UK, Singapore, Russian Federation and the UAE.
4.3.3.1.Fiscal measures
The particularity of measures undertaken by CBs over the globe was that they should be very definitely and accurately addressed to areas, industries and segments of economies that were mostly affected and suffered from losses in terms of lockdown. Besides, all measures taken by the CBs should be well-coordinated with numerous fiscal supportive programmes (Table 5) and should be directed on the financial stability of the FS (Table 6).
TABLE 5. - FISCAL MEASURES UNDERTAKEN BY THE GOVERNMENTS (IMF, 2020)
UK UAE RF Singapore
1. Total cost of tax and spending measures was GBP 85,5 bn: - GBP 48,5 bn - for NHS, public services and charities - GBP 29 bn - for businesses support - GBP 8 bn - to support vulnerable people 2. Guarantee programmes for SME and Large business. 3. Defer in VAT payments for the second quarter 1. Total cost of fiscal measures was AED 32 bn (2,8% GDP): - AED 16 bn to support private sector by reducing government fees, labour and other charges, refunding of guarantees and accelerating infrastructure development - AED ~7 bn - Dubai internal 1. Total cost of fiscal measures in 2020 was 3,5% GDP including: - directive increase in wages of medical staff - direct tripled pay-outs to unemployed after March 1, 2020 - all salaries of state employees were saved during the lockdown - direct pay-outs for every child in a family (the sum depended on the age of a child) - this measure was repeated in December 2020 - interest rate subsidies for SME and systemically important enterprises - tax defer for the major taxes for most supressed companies 1. Huge amount of fiscal support measures S$ 100.0 bn (20% GDP): - cash pay-outs to all Singaporeans, additional pay-outs for low-income individuals and unemployed - wages' subsidies for business till March 2021 - support to cover rental costs
of 2020 until the end of the financial year and income tax payments of the self-employed by six months.
4. Support of self-employed workers and fur-loughed employees.
5. Trade credit insurance for business-to-business transactions through the Trade Credit Reinsurance scheme.
6. Grants and loans (£1bn package) to support Firms driving innovation and development.
7. Direct pay-outs to low-income people
8. 15% VAT cut extension for different industries, extension the maturity of loans to up to 10 years and other measures.
Programme: providing additional water and electricity for people and implement
measures supporting local economy - AED 9 bn - Abu Dhabi
"Ghadan-21" fiscal stimulus programme
- social pay-outs of SME companies were cancelled for 6 months (extended for more 3 months)
- social taxes for SME companies were permanently reduced
- support for IT firms
- tax holiday for all taxes except VAT for Q2 for SME, individual entrepreneurs and self-employed
- self-employed were refunded their full taxes for 2019 and partly for 2020
- refund of social contributions for sole proprietors
- deferrals on rent payments for governmental property
- grants for SME in affected industries to cover salaries
- zero rate of import duty for pharmacy and medical equipment
- guaranteed loans to SME
- subsidies to air industry
- re-capitalization of the state-owned bank, airlines and development institution
- subsidizing of mortgage lending
- support to most affected industries including self-employed
- loan capital of S$ 20 bn was set aside to help business and individuals
- support to R&D investment
- national stockpile of health supply
- programme of food resilience
2. The COVID-19Re-covery
Grant was announced at the end of 2020.
4.3.3.2. Measures taken by the financial authorities
TABLE 6. - MEASURES UNDERTAKEN BY THE REGULATORS (IMF, 2020)
UK
UAE
RF
Singapore
MONETARY POLICY
1. Reducing Bank Rate by 65 b.p.
points to 0.1%.
2. Expanding the central bank's holding of
UK government bonds and non-financial corporate bonds by £450 billion (in three tranches announced in March, June and November).
3. New Term Funding Scheme to
Reinforce the transmission of the rate cut, with additional incentives for lending to the real economy, and especially SMEs.
4. Using of the government's overdraft account at the BoE as a short-term source of additional liquidity to the government.
5. The joint HM Treas-ury—BoE Covid
1. Decrease in policy interest rate
by 125 b.p.
2. AED 256 bn package of measures:
- reserve requirements were reduced to 7% from 14% for totally AED 61 bn;
- AED 95 bn liquidity buffer relief (jointly with the UAE Cabinet);
- unconventional collaterized loans to banks at 0% for the amount of AED 50 bn
- using of excess banks capital Buffers for the amount of AED 50 bn
1. Decrease in the key interest rate by 2% to 4.25% totally in 2020
2. As a response for oil price drop the National Welfare Fund was accessed for currency interventions in the domestic market to save national currency stability. FX purchases were resumed in 2021 due to the fiscal rule to buy US $ when the price for oil is above the baseline level
3. Increasing the limit of FX swaps with CBR
4. Implementing of the new long-term liquidity tool: 1 month and 1-year REPOs
5. 500-bn RUB refinancing facility for SME loans at the interest rate by 2.25% lower than usually (financed by CBR)
1. 0% annual rate of currency appreciation
2. Detailed package of measures to help individuals and SME to meet loan and insurance pay-out deadline
3. Support interbank funding market with liquidity
4. S$ 125 ml support package to sustain financial services and FinTech capabilities through the Financial Sector Development Fund
5. SGD Term Facility for 1 and 3 months in addition to MAS Stand Facility on the overnight basis
6. Widening of collateral for REPO and Loaning in USD and S$ for upper pricing
7. Helping Programme for borrowers with loan repayments enabling individuals - property owners
Corporate Financing Facility accompanied by the Coronavirus Business Interruption Schemes to make £330bn of loans and guarantees available to businesses (15% GDP).
6. Activating a Contingent Term Repo Facility to complement the Bank's existing sterling liquidity facilities.
7. The US dollar liquidity swap line arrangements (US $ 60 bn).
3. Placement of Islamic Bond of Dubai Emirate for the amount of USD 272 ml: bond in form of SUKUK at 4,71% ytm (OECD, 2020).
to limit their instalment payments by 60% of monthly income and opt SME to defer 80% of their principal payments
8. RMB 25 bn of funding to Singapore's banks
9. Restructuring Simplified Insolvency Programme for micro and small businesses and an option of re-negotiation of lease and licenses for commercial property
10. The US dollar liquidity swap line arrangements (US $ 60 bn)._
FINANSIAL STABILITY, MACROPRUDENTIAL SUPERVISION AND REGULATION.
1. Reducing the CCyB rate to 0% until at least 2021 Q4.
2. The PRA set out supervisory expectation in March 2020 that large banks should suspend dividends and buybacks until end-2020, cancel outstanding 2019 dividends and pay no cash bonuses to senior staff.
3. The PRA indicated all Pillar 2A requirements will be set as a nominal amount, instead of a percentage of total RWA.
4. PRA allowed firms to offset the increase in RWA due to the automatic application of a higher VaR multiplier through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements.
5. A package to support customers affected by coronavirus, including mortgage moratorium and moratorium for consumer credits till November, but then the moratoriums were extended until end-April 2021.
1. Reduction of provision for SME loans by 1525%.
2. Increase of LTV by 5 p.p. for first time buyers.
3. Limits for banks commission for SME loans.
4. Cancellation of all payment fees taken by CBUAE for 6 months.
5. Limit for banks' exposure to real estate was increased from 20 to 30% of RWA.
6. Permission to prolong loan payments till the end of 2020.
7. Relaxation in NSFR and ASRR till the end of 2021.
1. To value securities at March, 1 2020 prices for financial organizations in their reports
2. Re-valuation of FX assets and liabilities at 1 March 2020 rates (except open currency positions)
3. Contribution to the Deposit Insurance Fund was cut to 0,1%
4. Liquidity regulations for the systemically important banks were mitigated
5. Banks were enabled not to increase the provisions for restructured loans worsened by pandemic. Provisions should be fully completed until 01 July 2021.
6. Implementation of the new credit risk method calculation and lower risk weights for mortgages.
6. Lower risk weights for assets purchased in forms of subordinated bonds including perpetual papers of the largest non-financial corporations
7. Higher risks for bank holdings of NFC capital were postponed for 1 year
8. Lower risk weights for loans to medical and pharmaceutical firms
9. Risk-rate cut to 0% for loans to non-commodity exporters
10. Risk buffers for unsecured loans were reduced
11. Risk buffers for consumer loans issued by August 31, 2019 were cancelled
12. A cap on banks' online retailers' fees.
1. Mitigation in risk capital adequacy requirements for banks incorporated in Singapore in accordance with MAS Notice 637 (further prolonged and widened) concerning calculation of CET1, Tier2 and RWA for the particular assets.
2. Due to the raising distant facilities to ensure banks' safe management and operational resilience the Safe Management Measures for all financial institutions against cyber treats, operational and technology risks were implemented.
3. Recommendation for banks to limit dividends pay-outs by 60% of the 2019 amount of dividends and not pay in cash
The BoE's liquidity supply instruments range included: Loan to Asser Purchase Facility - the largest part, Term Funding Scheme - the second place, Long-Term REPO, Term Funding Scheme with additional incentives for SME (TFSME) and loan to Covid Corporate Financing Facility (CCFF). CCFF was announced in March 2020 as an innovative targeted scheme of lending that was designed together by HM Treasury and the BoE. The scheme facilitated non-financial firms that were already rated before the pandemic. In accordance with this scheme firms can pretend to the purchase of their commercial papers at pre-Covid rates. This prevented firms from disruption in their cash-flow. The BoE plays partially the role of Market-Maker of Last Resort giving the pre-Covid rates for the commercial papers of wide range of firms from 65 businesses. Currently the QE GBP 895 bn programme includes GBP 875 bn gilts and GBP 20 bn CP.
The statistics of MAS (MAS, 2021) confirms that foreign reserves grew sharply by 25,7% from January to December 2020 having achieved 102,3% GDP (from 75%) confirming its focus on national currency stability. The increase in reserve and deposit money from banks shows the comfortable level of liquidity in the market. The growth of foreign liabilities in the MAS's Balance Sheet reflects liabilities due to IMF and other borrowings in foreign currencies. The increase of other assets is explained by widening of the collateral range that can be used for REPO.
The UAECB's statistical bulletin of November 2020 confirms the extension of its Balance Sheet from AED 446 bn at the end of 2019 up to AED 455 bn in September 2020. The efforts of the UAECB and the Cabinet resulted in all money aggregates growth, for instance, from AED 515 bn to AED 584 bn for M1. Foreign International Reserves of the UAECB reduced from approximately AED 400 bn to AED 360 bn reflecting the applied forces of the CBUAE in national currency support. Another particular change in the UAECB's Balance sheet is that CBUAE's deposits were partly transfered into cash and equivalents. This strategy made the CB more operative on the market and expanded its opportunities for intervention if needed. The volume of purchased gold more than dubbled. This reflects providing the market by cash versus gold and replacement of foreign currency with the gold metal as an action of foreign reserves strategy. The amount of Certificates of Deposit issued by the CB reduced from AED 160 bn to AED 140 bn and created the additional cash for the economy. The amount of banks' reserves decreased by AED 10 bn as the result of obligatory required reserves from 14% to 7% on Demand Deposits per the Targeted Economic Support Scheme (TESS) that was launched in April 2020.
The significantly expanded balance sheet of the CBR (by 19% on the y-on-y basis) was not underpinned by using the wide range of instruments for liquidity supply. The main reasons for assets' growth lies in changes of the FX reserves structure: gold increased by 41% and the amount of reserves in foreign currencies raised by 20,55% partly due to national currency depreciation.
At the same time the monetary aggregate increased in the economy and it was reflected in the leap of cash in circulation from RUB 10 242 bn on the 31 January 2020 to RUB 13 181 bn on the 31 January 2021 (CBR, 2021). It is explained by the numerous quantative support of people and businesses and also by the reduction of reserves obligatory coefficient for banks. At the same time growth of other liabilities reflects the increase of the commercial banks deposits and the amount of bonds issued by the CBR for liquidity absorption (CBR, 2020). This confirms quite a comfortable liquidity level in the economy and shows potential for further economic stability.
All MP measures were supported by moratoriums for pay-outs requirements and defer fees and penalties. This underpinned the mitigations in capital adequacy and RWA calculation. Risk-management and other prudential supervision requirements were also tolerated.
5. Conclusions
Measures taken by governments and regulators shaped the economies in the period of uncertainty. Economists discuss low effectiveness of support explaining it by the tendency of people to save rather than to invest (Bingham, G. et al., 2021). In the context of the observed CBs actions it can be concluded that they succeeded in currency stability, put a stop to inflation drop and avoided systemic liquidity risks. It can be said that the total price for this is not identified yet. Banks will meet further difficulties with consumer loans and mortgages after they complete For central banks this crisis reminds that even though they are independent from the governments in monetary strategies, there is no CB over the globe which could separate itself from political and social life of the country.
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