Agustin Carstens, General Manager, Bank for International Settlements, in an op-ed piece in the Financial Times (30 March 2020), has raised concerns about the impact of the corona virus pandemic on global financial markets.
Drawing comparisons with the financial crisis of 2008, he says that “supervisory tools were designed to restrain banks from overextending themselves. Right now, we have the opposite problem: banks are not filling the void left by the retreat of market-based finance.” This is required to keep the global supply chains intact. He suggests drawing down “accumulated balance sheet buffers that were built while the sun was shining.” He also recommends a global freeze on bank dividends and share buybacks. Among other suggestions are government-guaranteed “tax deferral loans” to every small and mid-sized company to the extent of taxes paid last year.
While suggesting market-based solutions to deal with the market crisis, he also suggests that central banks should directly target individuals and customers that need it most. Otherwise, he adds, central bank actions will be like pushing on a string. How these constitute market-based solutions is not clear. We may have to await details if BIS is coming out with detailed suggestions. For starters, he commends the US Fed action of having entered corporate bond markets. The last mile is the key, he concludes.
© G Sreekumar 2021
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