The Financial Stability Institute (FSI) of the Bank for International Settlements issued its 5th Brief on public guarantees for bank lending in response to the COVID-19 pandemic. Highlights of the brief are as follows:
In response to the COVID-19 pandemic, governments have launched guarantee programs to support bank lending to companies, especially small and medium-sized enterprises. This is essential to avoid a sharp contraction in bank credit that would exacerbate the pandemic's adverse impact.
The design of such programs needs to strike a difficult balance between responding promptly to the pandemic and maintaining a sufficient level of prudence. Key features of a sample of programs (eg target beneficiaries, coverage of the guarantee, loan terms, length of the program) reflect this tension.
Incentives were created for the banks to join these programs by exploiting flexibility in existing prudential requirements, while central banks have often provided liquidity support. Programs are, however, subject to operational challenges and, ultimately, fiscal capacity limits.
A copy of the brief can be viewed here.
This post originally appeared on World Council's Advocate Blog.