Financial Sector Policies to Salvage Firms Hit by COVID-19

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00:00 Um,

00:01 yes,

00:01 it's 110.

00:03 OK,

00:03 Lester.

00:04 Um,

00:05 OK,

00:05 so welcome to all of you,

00:08 uh,

00:09 welcome to all of you

00:10 to

00:11 this,

00:11 um,

00:11 panel

00:12 on financial sector policies to salvage firms hit by COVID-19.

00:17 Um,

00:17 this is

00:18 an incredibly central topic for us

00:21 because,

00:22 um,

00:23 Figure out how to what the first panelists will hibernate our firms so

00:28 that when we come out at the other end we don't have,

00:30 we minimize the scarring that they've suffered and the economy overall

00:34 rebounds quickly is absolutely central to

00:38 to.

00:39 What we should be focusing on

00:40 and the financial sector is one of the key

00:44 tools that we have or key levers that uh

00:47 we need to be working with.

00:48 So we have an excellent panel today.

00:50 Um,

00:50 we're going to start with,

00:52 um,

00:52 Sergio Schmuckler

00:54 on financing firms in hibernation during the COVID-19 pandemic.

00:58 Um,

00:59 this is joint work with Tatiana Didier in,

01:01 um,

01:03 in EFI also Federico Jones,

01:04 Mauricio Larrain,

01:05 and,

01:06 and yes,

01:07 and Mauricio Larrain.

01:08 OK,

01:09 so each speaker will have

01:11 15 minutes

01:12 and then

01:14 Alfonso

01:15 Garciamora will come in with comments at the end

01:17 for 10 and then we'll open it for discussion.

01:20 Um,

01:20 Sergio,

01:21 please go ahead.

01:26 Well,

01:26 thank you very much,

01:27 Bill.

01:27 Thank you,

01:28 everybody

01:29 for correcting.

01:30 Thank you,

01:31 the speakers for participating.

01:33 And thank you,

01:34 the FCI team and the DEC team,

01:35 in particular,

01:36 Ryan and Ale for coordinating and making

01:40 everything run smoothly.

01:42 So the work that I will present today is a brief

01:45 that we have written,

01:47 as Bill was uh saying with uh Tatiana Federico Mauricio,

01:51 uh,

01:52 they are from Chile.

01:54 And this is a,

01:55 a brief that we put together

01:57 with the

01:59 World Bank um Research Center in Chile and the Malaysia hub

02:03 because uh this topic is also of special interest

02:05 to the Latin America and the Asian region.

02:08 So let me summarize uh the brief,

02:10 uh,

02:11 briefly.

02:12 Here

02:14 So as

02:15 everybody is probably connecting knows,

02:17 um,

02:18 the COVID-19 pandemic has had a profound effect on firms.

02:22 That there is a lot of heterogeneity across industries

02:26 and also across firms within industry.

02:30 At the two extremes,

02:31 there are some firms that are completely shut down.

02:34 Others are doing fine or are in the middle,

02:36 but the large mass of the firms are hurting.

02:40 And the policy debate now has moved

02:42 to the need to salvage firms,

02:44 in addition,

02:45 of course,

02:45 to provide assistance to households.

02:48 There are already many proposals to do so.

02:51 And what we do in this brief

02:53 is

02:54 basically try to provide a unifying framework

02:58 to organize a little bit the policy debate related to farm financing

03:03 during the pandemic.

03:05 We discussed the different policy choices,

03:07 uh,

03:08 given the challenges that policymakers face,

03:10 and we also discussed the trade-off

03:13 that policymakers are facing when trying to uh to save firms.

03:18 I will try to go very fast on the policy brief.

03:21 There's more discussion there,

03:23 but I will provide a summary here.

03:25 And in the brief,

03:27 we make 4 related points

03:29 that this is a different type of crisis than before.

03:33 The COVID-19

03:34 health crisis has had economic and financial effects.

03:39 This matters for both the transmission channel and the resolution of the crisis.

03:45 It has put a lot of stress on firm relationships with the different stakeholders.

03:52 And we argue that one way forward is for firms to hibernate

03:57 during this period of uh slow economic activity,

04:01 but one important point is that firms need credit to

04:05 go through this period.

04:07 And there is a lot of policy action on the

04:09 financial side to try to provide this financial assistance.

04:15 We argued that the existing uh in uh financial infrastructure is ill-equipped,

04:20 uh,

04:20 for the pandemic.

04:22 And if anything,

04:23 uh,

04:24 uh,

04:24 working within the existing uh infrastructure,

04:27 it could make the crisis worse.

04:30 So policymakers are forced to innovate right now

04:34 to try to come up with different alternatives

04:37 that are not there.

04:44 So

04:44 the typical financial crisis that we have seen,

04:47 or even an economic crisis,

04:48 usually they tend to originate in the financial system,

04:52 in banks or market participants that behave irresponsibly,

04:56 usually that um due to ex ante moral hazard.

05:00 Uh,

05:00 that produces a liquidity problems in,

05:03 in the market or in banks

05:05 that suffer runs,

05:06 and that gets transmitted to the real economy.

05:09 As,

05:10 as banks stopped lending.

05:13 With the current coronavirus crisis,

05:16 the root of the problem lies outside the financial sector.

05:19 This is a health issue that has imposed social distancing,

05:23 as,

05:23 as many people have argued,

05:25 this has uh created a supply and demand shock for firms.

05:30 Cash flows have collapsed at to unprecedented levels,

05:34 and firms are struggling to survive.

05:37 This also affects the financial sector that is lending to firms.

05:41 Or just to give you an example,

05:43 the days of cash in hand that firms have a different across industries,

05:47 there is a lot of heterogeneity

05:49 across uh firms,

05:50 as I mentioned,

05:52 but many firms,

05:53 and many industries

05:54 have 30 days of cash to continue operating.

05:58 Many other industries have,

06:00 uh,

06:00 firms have around 60 days of cash.

06:03 So

06:04 firms don't have a lot of cash to withstand a sustained,

06:07 um,

06:08 prolonged,

06:09 um,

06:09 lockdown period.

06:14 So this is,

06:15 as we mentioned,

06:15 the transitory health shock,

06:18 um,

06:19 that

06:20 once the immunity is attained,

06:22 the crisis will be resolved.

06:24 But as long as the shock does not persist for too long,

06:27 then most firms could remain solvent.

06:30 In the meantime,

06:31 there is a credit risk problem because we know that most industries as a whole

06:36 will exist later on.

06:37 There will be a restaurant industry,

06:39 an airline industry,

06:41 uh,

06:41 maybe a cruise industry,

06:43 but not all firms are likely to survive the lockdown.

06:47 So then banks face problems with the assets,

06:49 not necessarily with liabilities in typical financial crisis.

06:54 And they do,

06:55 they do not know how to lend.

06:59 So that might prompt banks to uh push firms into bankruptcy.

07:06 This transitory shock uh could make uh these bankruptcies uh inefficient.

07:12 Because firms depend on key relationships with stakeholders.

07:16 It takes time for firms to get to know and hire workers,

07:20 uh,

07:20 have good relationship with suppliers that provide specific parts,

07:25 uh,

07:25 build relationship with customers,

07:27 credits,

07:27 and even the government.

07:30 These relationships are very costly to build,

07:32 maintain,

07:32 and adjust.

07:33 They are part of the intangible assets of firms,

07:36 part of the organizational capital.

07:39 If these relationships are destroyed

07:42 during the crisis,

07:42 they will need to be recreated later on because,

07:45 as we mentioned,

07:46 we will need

07:47 airlines or restaurants later on,

07:50 uh,

07:50 healthcare providers,

07:52 etc.

07:54 So if we destroy,

07:56 if these firms get destroyed,

07:58 er this might lead to even a longer effects,

08:01 er,

08:02 longer hysteresis effects.

08:06 So what we argue is that one way forward

08:09 is for firms to hibernate,

08:12 firms that would be operating at a minimum capacity if needed,

08:15 it will,

08:15 they will burn some cash to withstand the pandemic,

08:18 and this idea of hibernation is different from the idea of freezing.

08:23 There has been a lot of discussion

08:25 in the press and in some countries about freezing the economy.

08:29 Here,

08:29 the,

08:29 the idea is not to freeze firms.

08:32 The idea is that the relationships that firms have are frozen.

08:35 But not destroyed.

08:37 Uh,

08:38 the different relationships,

08:39 um,

08:40 will probably have to absorb part of the shock.

08:42 Otherwise,

08:43 we will,

08:43 um,

08:44 create zombie firms,

08:46 uh,

08:46 Janet Yellen and other people are arguing

08:48 with,

08:49 uh,

08:49 a huge debt overhang,

08:51 uh,

08:51 later on.

08:53 But even though

08:55 firms can go to a minimal operation,

08:58 um,

08:58 mode,

09:00 they,

09:00 they will still need cash to survive

09:02 because they don't have that much cash to go

09:05 through this,

09:05 uh,

09:06 period.

09:08 And that cash can be provided by the financial sector.

09:13 So I was arguing the financial sector is not uh well designed

09:17 to resolve this type of crisis because usually um since crisis

09:23 start in the financial sector,

09:25 the idea of the financial infrastructure is to identify the bad apples

09:29 uh

09:30 that they are behaving uh wrongly that due to moral hazard.

09:35 And then avoid contamination to the rest of the financial system.

09:38 If there are bad firms or bad banks,

09:41 you separate them

09:43 and you keep the rest of the system moving,

09:45 and that's how the financial infrastructure,

09:47 the budget 3 regulation,

09:48 deposit insurance,

09:49 and then of last resort is designed to,

09:52 to,

09:53 to work towards.

09:55 So the timing in the typical financial crisis is to act fast to resolve

10:00 the crisis.

10:01 And once the,

10:02 the problem in the financial sector is addressed,

10:04 then the rest of the economy

10:06 recovers.

10:08 Here with the COVID-19 type of shock,

10:10 the evolution

10:11 doesn't depend on,

10:12 on solutions on the financial side,

10:14 on the,

10:14 in the,

10:15 on the economic side,

10:17 depends on the,

10:17 on the health uh resolution

10:20 and punishing firms in trouble is not a good option.

10:23 Usually during

10:24 typical banking crisis,

10:26 financial sector

10:28 problems,

10:28 you try to identify who's in trouble and remove them.

10:31 Here,

10:32 everybody's in trouble.

10:33 And that's not good news.

10:35 And it's not that they,

10:36 they are in trouble because they were behaving badly,

10:39 so punishing these firms would be counterproductive.

10:42 So,

10:43 so,

10:43 we have to go against the current infrastructure of the financial system,

10:47 and that's why policymakers need to innovate.

10:52 So there are different policies

10:54 uh that have been put forward.

10:57 The idea is to generate credit to go to firms

11:01 for refinancing existing debt

11:03 and for extending new financing

11:05 with the idea of avoiding bankruptcy and liquidation.

11:08 There is a big issue how to absorb and and redistribute

11:12 the increased uh credit risk that is in the system.

11:16 Who's going to take that risk?

11:19 In terms of the policies,

11:20 there are uh policies that go

11:23 towards adapting the institutional framework,

11:25 the existing institutional framework that is not

11:28 prepared to deal with the pandemic.

11:30 And there are policies related to providing credit to firms.

11:34 Those policies are,

11:35 are,

11:35 can be divided into two.

11:37 Some are policies related to providing liquidity to the intermediaries or banks,

11:42 and there are also policies that take direct credit exposure by the government

11:47 on firms.

11:50 So regarding the adapting the institutional framework,

11:53 the typical policies are,

11:54 uh,

11:55 policies related to forbearance.

11:57 Uh,

11:57 usually,

11:58 regulators don't like forbearance,

12:00 but in this case,

12:01 uh,

12:02 forbearance might be needed.

12:04 The government might need to work with different,

12:06 uh,

12:07 branches because it's not just

12:09 the regulators that can provide forbearance.

12:11 It might need to uh work with other,

12:14 um,

12:15 parts of the government.

12:16 And there is also a trade-off as in with all the policies.

12:21 Uh,

12:21 the trade-off is that by providing forbearance

12:23 you can provide rapid assistance like for,

12:26 for example,

12:26 postponements of,

12:27 of payments.

12:29 But you can create problems of more hazard.

12:32 You have already an a problem that you might

12:35 bail out firms that were behaving badly um before,

12:38 and you might give incentive for firms to behave badly later on.

12:42 And there is a question of uh redistribution

12:45 or who,

12:46 who is taking the risks,

12:47 so that is not uh easy to solve.

12:51 The,

12:51 the,

12:51 the,

12:53 the policies related to providing liquidity to intermediaries

12:57 are there,

12:58 they are rapid to implement,

13:00 uh,

13:01 they involve reducing policy rates,

13:03 extension of bank liquidity to banks,

13:05 etc.

13:07 But it's not clear that they are going to be

13:09 super effective because even if we give liquidity to banks,

13:12 the banks don't know who to lend,

13:15 given the increased credit risk and the uncertainty about

13:18 which firms are going to survive the crisis.

13:21 And also,

13:22 we might

13:23 put,

13:23 um,

13:24 create instability in the banking system

13:28 if they take uh too much risk.

13:29 Um,

13:30 Vidal will,

13:31 will probably mention

13:32 some of these issues uh in his presentation later on.

13:38 And then there is the other policy which is a great risk to government,

13:42 which is the,

13:42 the red line here.

13:44 Uh,

13:45 many countries have,

13:46 in addition to other

13:48 uh revenue and expenditure measures,

13:50 they have taken big

13:52 chunk of risk

13:54 towards uh lending to corporations,

13:56 providing loans,

13:57 equity injections,

13:58 and guarantees.

14:01 These,

14:01 uh,

14:01 there are different instruments for the government to take risk on firms,

14:05 uh,

14:05 through

14:06 capitalization of state-owned banks,

14:08 uh,

14:08 scaling up of,

14:09 uh,

14:10 private credit guarantees,

14:11 etc.

14:12 It depends on whether the loans go to SMEs or to large firms.

14:18 And there is a trade-off here.

14:20 The benefit is that you give rapid access to credit,

14:24 and the drawback is that you are blowing up

14:27 the balance sheet of the government,

14:28 so the government is taking a lot of risk.

14:30 It might be

14:31 owning the private sector at the end of the crisis.

14:34 So each different policies have different uh trade-offs

14:38 and,

14:38 and the,

14:39 the policymakers will need to

14:41 prioritize

14:42 which policies might um

14:44 be best for the different countries,

14:47 uh,

14:47 for example,

14:48 how much to save large firms as as as SMEs,

14:51 how much to save firms with different relationships with stakeholders,

14:55 uh,

14:55 firms that have a lot of workers versus suppliers,

14:59 uh,

14:59 essential industries,

15:00 uh,

15:01 whether are,

15:01 are those are will receive priority.

15:04 And whether they let the financial assistance is conditional

15:09 on keeping certain relationships.

15:11 There is a lot of debate of whether firms are using.

15:14 The money that they are receiving from the

15:15 government to keep workers or fire workers.

15:20 There is also an allocation of resources over time

15:23 that the government needs to decide how much to provide

15:26 during the hibernation period

15:27 vis a vis how much to provide when the

15:30 crisis gets resolved and the economy needs to reignite.

15:34 A lot of countries with differences,

15:36 um,

15:37 so in these conditions matter.

15:40 They stark differences between developed and developing countries,

15:43 just speaking to,

15:44 um,

15:44 Thorsten's uh,

15:46 presentation,

15:46 he will mention some of these issues,

15:48 uh,

15:48 later on,

15:50 and there are also a lot of differences within each group.

15:53 And there is finally an intergenerational issue.

15:57 The,

15:57 the lockdown

15:59 can be viewed by some as trying to save uh uh

16:02 older people

16:04 and punish young people that cannot go to work.

16:07 Here,

16:07 that intergenerational transfer is not there

16:11 because we are,

16:12 young people will pay for the debts that the governments are accumulating,

16:17 but our young people are the ones that are going to benefit.

16:21 Also,

16:21 relatively young people are going to benefit from our farms being saved.

16:25 So in that sense,

16:26 that intergenerational transfer

16:28 uh is different than from the lockdown intergenerational transfer.

16:33 Let me stop here,

16:34 um,

16:34 given the time,

16:35 but we can um continue the discussion

16:38 later on.

16:38 Thank you very much.

16:43 Thank you,

16:43 Sergio.

16:44 Um,

16:44 excellent introduction for the panel.

16:47 Um,

16:47 our next speaker will be Marcus Brunnemeyer.

16:50 He's Edwards S.

16:51 Sanford Professor of Economics and Director of the

16:54 Bentheim Center for Finance at Princeton University.

16:57 I should also mention that he runs a podcast on COVID,

17:00 um,

17:00 out of Princeton,

17:01 which has featured,

17:02 uh,

17:02 many prominent economists thinking about key elements of this and it's

17:06 highly recommended.

17:07 Um,

17:08 I will just

17:10 leave it at that.

17:11 Marcus,

17:11 please go ahead,

17:12 15 minutes.

17:14 Thanks a lot,

17:15 uh,

17:15 Bill.

17:15 It's a pleasure to be here.

17:16 Uh,

17:16 can you see my slides?

17:18 Yes,

17:19 OK,

17:19 fantastic.

17:21 OK,

17:21 that's,

17:21 uh,

17:22 I would like to pro put a proposal forward

17:25 which I wrote down with Alvin Krishnamurti from Stanford.

17:29 And

17:30 oops.

17:32 Before I start,

17:33 let me just um

17:35 compare the current crisis with the 2008

17:38 global financial crisis,

17:39 just to get a different perspective

17:41 of how the different challenges,

17:43 how the challenges are different.

17:46 So what I would say,

17:47 if you look at the pre-crisis phenomenon

17:49 of

17:50 2008,

17:50 there was a huge buildup of imbalances,

17:52 there was a run up of credit,

17:54 banks,

17:55 this particular shadow banks were thinly capitalized.

17:58 While in 2020,

17:59 you know,

18:00 unemployment was very low.

18:02 And actually,

18:02 the economy was doing pretty well.

18:04 Uh,

18:05 we had a lot of corporate debt and the US government was going

18:07 into debt a lot because of corporate tax cuts and other elements.

18:10 But in general,

18:12 it was a well-balanced,

18:13 uh,

18:14 economy.

18:14 So that's

18:15 a very different from a standard recession,

18:17 which is more driven by imbalances building up

18:20 on the financial side.

18:22 So what triggered the crisis,

18:24 the crisis in 2008 was more revaluation crisis.

18:27 So real estate was re-evaluated.

18:29 In a sense,

18:30 there was a change in this drastic discount factor,

18:32 because we totally misestimated the correlation of house

18:35 prices across the regions in the United States,

18:38 and that caused a lot of ripple effects and knock-on effects.

18:41 While

18:42 in 2020,

18:44 it's much more a drop in corporate cash flows.

18:46 And it was,

18:47 of course,

18:47 induced by the lockdown.

18:50 And that's a,

18:51 that's a big difference.

18:53 Uh,

18:53 so one is more us come back,

18:55 but the other one is uh more the,

18:56 the cash flow aspect to it.

18:59 And the question is how much can you do,

19:00 uh,

19:01 in,

19:01 in the latter.

19:02 And what,

19:03 how,

19:03 and then there was amplification because of balance sheet effects.

19:06 And in 2008,

19:07 it was primarily the

19:09 The households and the bank's balance sheets.

19:11 But right now,

19:12 it also includes to a large extent corporate,

19:15 the corporate sector

19:16 as well.

19:17 And the financial sectors,

19:18 of course,

19:18 always involved in that.

19:20 Uh,

19:20 we have shadow banks.

19:22 A lot of special purpose vehicles,

19:24 but they were mostly partly connected at least to the banking sector.

19:29 Now we have a lot of fintech

19:32 in mortgages,

19:33 but

19:33 for the SME funding from the corporate sector,

19:36 small and medium enterprises,

19:37 banks are still the dominant funders.

19:39 Across the world so much more in Europe,

19:42 but also in the US.

19:43 If you talk to SME data providers,

19:46 and we talked at length with SME data providers,

19:49 if the banks are still predominantly funding SMEs,

19:52 even in the United States and outside of the United States,

19:55 it's even more so.

19:57 In terms of structured finance,

19:59 um,

20:00 Warren Buffett called CDOs as weapons of mass destructions for the finance.

20:04 I think now we have CLOs,

20:06 uh,

20:07 where the loans,

20:07 the structured finance products as well there.

20:10 And importantly,

20:11 and I will come back to that.

20:13 Uh,

20:13 what was the objective of the policy in 2008 was to stimulate the economy,

20:18 to balance it.

20:19 Uh,

20:19 right now,

20:20 it's all about survival.

20:22 So it's making sure that certain firms survive

20:24 and households financially survive rather than stimulating accessing,

20:27 uh,

20:28 additional spending.

20:29 So it has very different implications,

20:30 what you should do with an interestst cut or not.

20:33 Do you want to stimulate,

20:34 uh,

20:34 the economy or do you want to just make sure that

20:36 firms can survive,

20:39 um.

20:40 So what's the challenge?

20:42 So the challenge is like coming back to

20:43 the hibernation strategyer pointed out so nicely.

20:47 I thought about it.

20:48 So if you could just stop the clock

20:51 and go to hibernation for the whole economy.

20:54 And you say all rent payments,

20:56 all payments are just stopped for 3 months,

20:59 and all wage payments and all the other debt is just,

21:02 the maturity is just extended by 3 months,

21:04 and it actually will be fairly easy.

21:06 We could just implement a strategy,

21:08 you know,

21:09 for 3 months,

21:09 no payments happens whatsoever,

21:11 and all other maturing debt is just extended by another 3 months.

21:16 So we just stopped the clock,

21:18 essentially.

21:19 And

21:20 the whole system,

21:21 there will be no freezing,

21:22 there will be no bankruptcy,

21:23 there will be nothing,

21:24 and everything will be working

21:25 uh very well.

21:26 The big challenge comes

21:28 that we,

21:29 we can't stop the whole economy,

21:31 but only part of the economy.

21:33 So we have some essential sectors,

21:35 food,

21:36 food production,

21:37 and so forth.

21:38 The healthcare sector and other things,

21:40 which have to be still be working or even working

21:43 even more if you think of the healthcare system.

21:45 And you have to make the payments to

21:47 the healthcare system and everything is interconnected.

21:50 And you want to stop part of the system,

21:53 but keep The other parts still running,

21:55 so shutting down part of the economy,

21:57 which is interwoven

21:58 to,

21:59 to each other,

22:00 that makes the whole thing so complicated

22:02 because we can't just simply say all payments

22:05 won't happen and everything is fine or everything is stopped.

22:09 And we just go in hibernation

22:11 for a few months.

22:12 And that makes the whole thing challenging.

22:16 So I thought about,

22:17 so we now have many policy actions to be undertaken,

22:20 and I tried to provide some taxonomy,

22:22 how to classify

22:24 these policy actions.

22:25 And um

22:27 That's what I mentioned this slide already in the,

22:30 in the webinar series,

22:31 um

22:32 Bill mentioned before.

22:34 So how can you classify the policy actions?

22:36 You can be either very firm focused,

22:38 or you can be very household focused.

22:40 And I said mentioned already,

22:41 this case is different because

22:43 the corporate sector is also very much involved.

22:47 The second dimension,

22:48 you can say it can be very broad brushed,

22:50 or very targeted.

22:52 And we might not have the fiscal space to go very broad brush.

22:56 Um,

22:57 there is,

22:57 you know,

22:58 we have to probably be more targeted.

22:59 I mean,

23:00 there's all this debate and now it's a time to go for universal basic income,

23:03 but you know,

23:04 now we have even less fiscal capacity

23:06 or fiscal space to do so.

23:09 And there's an idea by Craig Mink who

23:10 was pushing essentially that you do expose targeting.

23:14 You're very broadcast,

23:15 distribute funds and cash,

23:18 but exposed

23:19 the guys who don't really need it,

23:20 you have to pay it back.

23:22 And that's a debate,

23:23 you know,

23:23 you can think of,

23:24 you know,

23:24 because we cannot evaluate at the moment who really needs it most,

23:28 we will figure out later on.

23:30 But this also comes with huge problems that people might not spend it.

23:33 I said,

23:34 oh,

23:34 you give me this money,

23:35 but I might have to pay it back,

23:36 so I might not spend it.

23:38 And that's also hugely there might be no pickup

23:41 of these programs at all.

23:42 And we have seen from the last crisis,

23:44 there were a lot of housing programs,

23:46 uh which were not picked up at all.

23:48 And I think that's my fear from this exposed targeting,

23:51 even though it's a,

23:51 it's a good idea,

23:53 it might not work in practice.

23:56 The third dimension is you can think of loans versus grants.

24:00 And,

24:00 you know,

24:01 if you

24:01 give some loans,

24:03 again,

24:03 there's this,

24:04 this pickup problem if you make it uh exposed conditional,

24:08 if you give grants,

24:10 again,

24:10 there's this um

24:12 element

24:13 that it might be too costly,

24:15 you,

24:15 you have no um

24:17 physical capacity to really do that.

24:19 And

24:20 And of course,

24:21 you would like to have some risk sharing to

24:23 some extent across these two sectors in the economy,

24:26 which are all interwoven

24:28 in some way.

24:30 The third element that's related to,

24:32 you know,

24:32 the,

24:33 the pickup aspect,

24:34 how do you channel the government support

24:36 uh

24:37 to the economy.

24:38 So you can directly give money through uh to the house,

24:42 household sector.

24:43 And

24:44 that's typically is not so easy.

24:46 Just the helicopter money is debated about.

24:49 It's not so easy.

24:50 Even sending out checks in the United States is very,

24:52 very complicated,

24:53 and it depends very much on the government structure,

24:56 the governance structure the government has in place.

24:59 So if the certain schemes already in place,

25:02 like in Germany of the Kurtzerbeid or short term work scheme,

25:04 it's working extremely well.

25:06 is dried out many,

25:07 many times.

25:08 So you can easily channel funds

25:10 um

25:11 through very easily.

25:12 Uh,

25:13 if you have what's central bank digital currency,

25:16 which something was hotly debated before the COVID crisis,

25:20 Should we have central bank digital currency

25:22 where

25:23 most citizens have an account with the central bank.

25:25 If you have this,

25:26 then you could transfer funds more easily.

25:29 So this setup,

25:30 this institutional setup matters to a large extent

25:33 how you can channel funds through.

25:35 So either directly to households

25:37 or to households via firms.

25:38 So the short-term work would work primarily you pass on funds

25:43 to firms who then commit not to fire the workers and

25:46 still continue paying wages to households.

25:50 And that's uh something

25:51 which to,

25:52 to think about.

25:53 And it might work in certain countries,

25:55 might not work in other countries.

25:56 So it has to be very specific.

25:59 And,

25:59 and of course,

26:00 uh you can also pay

26:01 to firms

26:02 via banks,

26:03 and that's to a large extent you have to do with banks.

26:06 If you don't do it very broad I want to find it

26:08 to really channel it to the uh parts of the SME.

26:12 In

26:13 enterprises

26:14 who really need it,

26:15 then you have to

26:16 go to some entity like the banks who know who really needs it.

26:19 But there's huge problems there too.

26:21 We see,

26:22 in particular,

26:22 the banks pass on to the guys who are least risky and need it the least.

26:27 And that's um

26:28 a problem

26:29 as well.

26:31 And then finally,

26:32 there's uh

26:33 should

26:33 The current policy action be really focused on just solving the current problems,

26:39 or should it be more broadly focused on structural problems to

26:42 solve it in a particular way which channels already the future

26:46 uh governance structure in a particular way.

26:48 And there's all this debate,

26:49 uh Which is coming forward also,

26:52 uh,

26:52 from certain leaders

26:54 uh in various governments,

26:55 say,

26:55 OK,

26:56 now,

26:56 we should also use,

26:58 solve the COVID crisis in such a way that it's also helpful,

27:00 for example,

27:01 for climate change and other aspects.

27:03 So that makes the whole

27:04 policy action even more complicated.

27:07 Now,

27:08 but after doing this broadcast,

27:09 let me go to this

27:11 uh uh policy we have proposed with Arvid.

27:14 And I have a picture here which just shows,

27:16 you know,

27:17 everything is upside down now.

27:19 And

27:20 The argument then essentially is that

27:23 what

27:24 you should have done

27:25 in normal crisis,

27:26 you should not do now.

27:28 And what you

27:29 shouldn't do in normal prices,

27:31 you should do now.

27:32 So everything is flipped around.

27:34 So it's upside down.

27:35 So usually,

27:36 you focus on creating stimulus,

27:39 so cut the interest rate to stimulate spending and investment.

27:42 This doesn't help anyway,

27:43 because nobody will go to restaurants or demands certain things.

27:46 You can even make it cheaper,

27:47 you can set the interest rate minus 20%.

27:49 It doesn't really work.

27:51 Uh,

27:52 and,

27:52 and here it's very much focused on survival,

27:54 as I mentioned earlier.

27:56 So what's,

27:56 uh,

27:57 what's this particular proposal about?

27:59 One is to recognize,

28:01 it's very different from country to country because the insolvency

28:05 law is different from country to country.

28:07 So that's the first thing.

28:09 In the US you have the Chapter 11,

28:11 which works really well for large companies,

28:13 and it wipes out the shareholders.

28:15 But the companies keep on running.

28:16 So if you have large companies,

28:18 that's not a big deal in a sense,

28:20 we are

28:21 had airlines which go bankrupt all the time,

28:23 you don't hardly notice as a customer or society

28:26 that

28:27 they go bankrupt.

28:28 Um,

28:29 it's not good for the shareholders,

28:30 but for society,

28:32 it's not a dramatic thing.

28:33 But if you have SMEs

28:36 were,

28:37 these are more entrepreneurial firms,

28:38 where entrepreneur

28:40 himself has equity stake.

28:41 And if he doesn't have enough equity,

28:43 then the whole firm doesn't work anymore.

28:45 And for them,

28:46 you need a different structure.

28:48 And

28:48 the usual

28:50 aspect in the recessions is to avoid evergreening.

28:52 So evergreening,

28:54 meaning that

28:55 banks just constantly keep on funding,

28:58 um,

28:59 for the new loans

29:00 in order to uh

29:01 uh pay off old loans.

29:03 And the banks are just busy doing that type of funding instead of funding new,

29:08 more productive firms,

29:09 new startups,

29:09 and other firms.

29:11 And that typically you want to avoid just thinking of Japan situation,

29:15 productivity goes down,

29:16 everything is

29:17 not going well if you don't fund new firms,

29:19 and you keep on funding old zombie firms.

29:22 Now,

29:23 in the COVID recession,

29:25 you really want to promote evergreening.

29:27 So you want to offer

29:28 banks a cheap central bank funding to roll over loans

29:31 in order to stabilize the existing businesses or

29:34 stabilize the linkages as Sergio pointed out,

29:37 uh,

29:37 among the whole social capital,

29:40 uh,

29:40 which is out there in the economy.

29:42 So how can you promote this evergreening?

29:44 So you can promote this evergreening with

29:46 carrots and also with sticks.

29:49 OK.

29:49 So the currency is

29:51 to provide the banks,

29:52 the central bank provides essentially cheap funding.

29:56 And

29:57 uh

29:58 one,

29:58 how could this be if you have a

30:00 rollover loan for an SME

30:03 you can use this loan.

30:05 It's very favorable.

30:07 Terms as a collateral

30:09 at the discount window,

30:10 let's say at the central bank.

30:12 So this loan should be exclude existing co loans,

30:14 loans that come due in the next 3 months.

30:17 So in particular,

30:18 it is a roll of loan,

30:19 a loan the bank was willing to grant before the crisis is considered as safe.

30:23 A loan which

30:25 is newly given to a new company,

30:27 it might not be safe to be.

30:29 Has problems.

30:29 So you say rolling over all loans

30:32 is granted.

30:32 That's what the evergreening comes in because the banks said at that time,

30:36 it was a good loan to grant,

30:37 and then we just want to keep this firm alive

30:40 and roll it over.

30:41 And

30:42 you get

30:42 at the discount window of rate,

30:44 let's say 2-3%.

30:46 It's a little bit like

30:47 the uh targeted LTRO,

30:49 the ECB's granting.

30:51 But for the US or for other countries,

30:53 you go to the discount window only get this favorable discount rate,

30:57 uh,

30:58 at a negative,

30:58 potentially negative rate.

30:59 So it should be 10% less than the typical policy rate.

31:03 And of course,

31:04 the Fed is very reluctant to go to negative territory,

31:06 but for this part

31:07 particular subsection,

31:08 it can go

31:09 in the negative territory and has

31:12 done this discrimination across various funding

31:14 arrangements already in the past.

31:16 So it's part of the 1333

31:19 uh legislation.

31:20 Then,

31:21 the next thing is to stick.

31:23 So if a bank is not rolling some loan,

31:26 then you want

31:27 And the old loan is not paid back.

31:30 You want to be very

31:31 strict on declaring this old loan as non-performing.

31:35 That's a stick,

31:36 essentially.

31:37 So you want to give really the bank an incentive to evergreen to roll over the loan.

31:42 And that's more generally.

31:44 But more generally,

31:45 you want to slow down

31:47 the bankruptcy procedures.

31:49 And you want to clean up the system very fast,

31:51 you want to speed up bankruptcy procedures.

31:53 Now you want to do the opposite.

31:55 So it seems all very paradoxically.

31:58 Paradoxical.

31:59 But I think that's

32:00 the main message of this proposal and from a broader theoretical point.

32:04 And then we have particular implementation

32:07 for SMEs using this evergreening aspect.

32:10 So let me stop here

32:12 and uh

32:14 pass it back to to Bill.

32:16 Sergio.

32:18 Thank you very much,

32:19 Marcus.

32:19 That

32:20 is very provocative.

32:22 Um,

32:23 OK.

32:24 Our next speaker is

32:26 Viral

32:27 Acharya,

32:28 who is CV Star Professor of Economics

32:31 in the Department of Finance at New York University Stern School of Business.

32:35 Um,

32:36 I think it's also interesting for us to know

32:38 that he was deputy governor of the reserve.

32:40 Bank of India

32:41 from 2017 to 2019 in charge of monetary policy,

32:45 financial markets,

32:46 and financial stability,

32:47 and he was the director of the National Stock Exchange.

32:50 So he brings a very

32:52 proud focus as well

32:54 to his talk.

32:55 So welcome Vira.

32:57 Uh,

32:57 thank you,

32:58 Bill.

32:58 Uh,

32:58 thank you,

32:59 Sergio,

33:00 for inviting me.

33:01 I just want to confirm if you're able to see my slides.

33:10 Now we,

33:10 now,

33:10 now we see them.

33:11 Yes,

33:11 now you see them.

33:12 OK,

33:13 very good.

33:14 Um,

33:15 so,

33:16 um,

33:16 you know,

33:16 I want to take off a little bit from where,

33:19 uh,

33:19 Marcus,

33:20 uh,

33:21 left,

33:22 and,

33:22 um,

33:23 uh,

33:23 I'll talk a little bit about the program

33:25 that's been implemented in the United States,

33:28 uh,

33:29 and it shows the

33:31 limitations,

33:32 uh,

33:32 sometimes of trying to do things

33:35 through the fiscal route.

33:37 Um,

33:38 and,

33:39 uh,

33:40 and I think

33:41 I want to then move into why

33:45 we may want to ensure that the intermediation channels remain healthy,

33:50 uh,

33:50 for down the line,

33:52 uh,

33:52 recovery or the morning after,

33:54 uh,

33:54 in the meantime.

33:56 Uh,

33:57 so I,

33:57 I think I want to end up though with a broad concept of a pandemic stress test.

34:02 Uh,

34:03 I haven't thought through it 100%,

34:05 but,

34:06 uh,

34:06 I'll shed a little bit of light on the kind of things we

34:09 have to think about when we see whether structurally the intermediation sector,

34:14 uh,

34:14 at least the banks are positioned right for the recovery or not.

34:18 So,

34:19 uh,

34:20 as you know,

34:20 in the United States,

34:21 the Paycheck Protection Program has been implemented around

34:26 in two tranches,

34:27 close to $650 billion has been allocated to it.

34:32 Uh,

34:32 before the first program was announced,

34:35 uh,

34:35 I had put out a short note with one of my PhD students who

34:39 does a lot of work in small businesses to make the program more effective.

34:44 And actually our main recommendation was fairly simple that

34:50 that even a country as large as the United States,

34:53 the safe haven,

34:54 reserve currency,

34:55 etc.

34:57 does face fiscal constraints.

34:58 It can't get any package passed through the Congress whenever it wants.

35:03 And so to the extent that

35:05 the needs

35:07 for the corporate sector,

35:08 the private sector to keep employees on payroll.

35:12 have been estimated

35:14 for three months to be as high as $1.2 trillion

35:17 and

35:18 that's really not the allocation made to the program.

35:22 It would seem rather important to target the program,

35:25 get it where the likelihood of a slowdown

35:29 or the shutdown

35:31 is perhaps the highest.

35:32 This could be done objectively.

35:35 Some economists have

35:37 Provided a classification of sectors or businesses into

35:41 jobs that can be done more readily from home

35:44 than otherwise.

35:48 Unfortunately,

35:49 for whatever reason,

35:50 the program was chosen not to be targeted.

35:54 It was essentially,

35:56 you know,

35:56 eligible banks

35:58 would essentially make applications to the Small Business Administration.

36:02 And I've actually found out through some internal

36:06 contacts of people who are supporting the SBA that

36:10 actually they're following something like a round robin algorithm which

36:13 is that they approve one loan from every single bank first

36:18 before you kind of reach,

36:20 uh,

36:20 you know,

36:20 exhaust some banks,

36:21 etc.

36:21 So this has led to

36:23 It turns out there was already a paper

36:25 that I saw yesterday from Chicago Booth professors.

36:29 They've got access to confidential data that SBA

36:32 refused to give to the Wall Street Journal.

36:34 I don't know why,

36:35 uh,

36:36 but it turns out that

36:38 the top 4 banks account for 36% of the total loans,

36:43 but they've disbursed less than 3% of all the loans

36:46 because of this round robin algorithm that's being applied.

36:49 Uh,

36:49 funds don't necessarily seem to have flown into

36:52 the more adversely affected areas of the pandemic,

36:55 uh,

36:56 which also seems a problem.

36:58 So,

36:59 uh,

36:59 uh,

37:01 the long and short of it is that,

37:02 and this was my experience also at the Reserve Bank of India,

37:05 that there are limits to

37:07 the design of these programs when done through centralized authorities.

37:12 Uh,

37:12 sometimes they are not

37:14 done with economics in mind.

37:16 Uh,

37:17 sometimes they are too worried about the

37:18 optics and the distributional consequences in a,

37:22 in an optical sense rather than in an economic sense.

37:26 Uh,

37:26 and perhaps there are political economy constraints to even using what might

37:30 seem objective criteria to favor allocation in time such as this.

37:36 So,

37:36 uh,

37:37 uh,

37:37 in the end,

37:38 uh,

37:39 I want to therefore turn to

37:42 the intermediation sector,

37:44 uh,

37:45 and I want to talk a little bit about how it has

37:47 been doing in terms of provision of liquidity to the corporate sector.

37:52 And I want to raise the issue that we may

37:55 have to think about the health of the banking sector.

37:58 I'm going to use the United States as an example.

38:02 And I think there are many reasons for this.

38:05 One is that what seems temporary right now

38:09 may actually be a deeper and a more protracted recession

38:14 for the simple reason that different parts of the world

38:17 are going to recover in a very staggered manner.

38:19 And so global activity,

38:20 even in the recovery phase,

38:22 may have a natural inbuilt hysteresis given that the start

38:27 of the pandemic,

38:28 it spread.

38:29 And perhaps containment

38:31 are really happening with different

38:35 sort of synchronicity across countries.

38:38 Uh,

38:40 There's also something I'm going to show you

38:42 which suggests that banks are likely to be.

38:46 Bank capital is likely to get locked up

38:49 with those borrowers who can prearrange

38:52 liquidity facilities or lines of credit,

38:55 and this is going to mean that the likes of small businesses

38:58 that very often are not in the market for liquidity insurance,

39:02 they rely on spot loans from banks,

39:05 may actually get crowded out as and when even the recovery takes hold,

39:11 perhaps even earlier than that.

39:13 I like to think of it as a contamination effect,

39:16 which is that banks would like to

39:18 provide liquidity insurance to the relatively healthy firms,

39:22 but now when they draw down the lines of credit,

39:24 their capital is not available actually to

39:27 provide liquidity to those who are actually not in the insurance markets.

39:32 And third and last point before I move on to showing you some facts is that.

39:38 We have always regretted delay in stabilization of

39:41 the banking sector in terms of capital requirements.

39:44 If you recall,

39:45 probably in Q3 and Q4 of 2007,

39:49 we thought probably,

39:50 you know,

39:51 the crisis was not going to blow up in any significant way,

39:54 and unfortunately it did.

39:56 And I'm quite concerned that

39:59 that we may not

40:00 be able to simply arrest this

40:03 in a temporary manner.

40:04 There may be some aftereffects of what is going on.

40:09 OK,

40:09 so as you know,

40:10 uh,

40:11 firms do arrange liquidity insurance in the form of credit lines.

40:16 Uh,

40:17 generally these are used as last resort,

40:20 forms of liquidity insurance,

40:23 uh,

40:24 and

40:25 they are drawn down when markets otherwise freeze for banks.

40:30 They could freeze because of.

40:33 Uh,

40:33 wholesale finance such as commercial paper folding up,

40:37 bank loans getting expensive,

40:39 bond markets not having much liquidity.

40:42 So just to motivate this,

40:45 right around

40:47 the early March,

40:48 once the contagion

40:50 of the

40:52 disease seemed to be spreading

40:54 severely to the United States,

40:57 essentially wholesale finance

40:59 froze up

41:00 and borrowers started drawing down

41:04 in an unprecedented manner on their credit lines from banks.

41:08 Uh,

41:09 this quote seems to suggest that the total credit

41:13 commitments to corporations are on the order of $2.5 trillion

41:18 and actually 2/3 of these are provided by just the four large banks

41:23 in

41:24 the United States.

41:24 Now note that these were also the four large banks

41:27 who also hold the lion's share,

41:29 36% of the small business loans in the United States.

41:35 So the question is,

41:35 can banks withstand such a tsunami of drawdowns?

41:40 It depends.

41:41 I'm going to first show you a stress test

41:43 that is based on two past recessions.

41:46 So this is the 12 and the 07 08.

41:50 So what have we done here?

41:51 What we have done here is the leftmost columns show you the outstanding credit,

41:56 credit lines by rating category as of now.

42:00 Uh,

42:00 so these are actually on the order of um

42:07 $1 trillion and then you can see by different categories of loans.

42:12 This is just for banks.

42:13 Some of the

42:14 syndicated facilities also have participation from other players in this market.

42:19 Usually the lead banks hold the lion's share of these facilities.

42:23 Then the second column,

42:24 which is the percentage,

42:26 shows you the drawdowns,

42:29 sorry,

42:30 these are the drawdowns in the overall.

42:31 The 3rd column shows you

42:33 what drawdowns over a period of 12 months happened in

42:37 these lines of credit during the past two recessions.

42:40 The second scenario only uses the global financial crisis for the stress,

42:45 but actually the global financial crisis was

42:48 not too different from the corporate recession of 102.

42:52 And if you then extrapolate from these drawdowns into the actual numbers,

42:56 what you see is that

42:58 it would imply about 25 to 30% of drawdown that banks should witness

43:03 around $250 billion of drawdowns on these lines of credit.

43:09 Now the question is,

43:10 is this large,

43:12 so you can look at the 100 largest banks,

43:14 and we did this.

43:15 And just in pure terms,

43:18 uh,

43:18 the level of drawdown implied by the past two recessions would

43:22 cause only about slightly

43:25 around 1% of their capital.

43:28 So what happens is these contingent liabilities will now come on the balance sheet.

43:32 There'll be a capital allocation from that that's much

43:35 higher than when they were just lines of credit,

43:37 and that's basically going to lock up in

43:40 some sense the capital that you thought was available

43:43 on these new loans which are being made.

43:45 If there was an extremely adverse scenario,

43:48 so in fact you had a close to a full drawdown,

43:51 then the tier 1 ratio would come down by another percentage point.

43:55 But of course this is going to be coincident with several

43:57 other scenarios such as very high default rates on existing loans,

44:02 perhaps severe drawdowns on credit card facilities,

44:05 and so on.

44:06 And we think that the banks in this scenario

44:08 would be brought quite close to the regulatory.

44:12 So anyway,

44:12 these are just sort of one-off calculations.

44:15 The question is what has happened.

44:17 And it turns out that

44:19 just in one month of March,

44:21 actually the stress seems more intense

44:24 than what it was for a whole year in the past recessions.

44:28 So what we did is,

44:29 uh,

44:30 first I want to show you that banks have indeed been hit rather hard.

44:34 So the left graph here shows you the performance of banks.

44:38 Relative to firms,

44:41 of course there's a little bit of cross insurance happening here is that

44:45 precisely because the lines are getting drawn down,

44:47 firms are actually being cushioned

44:49 and the banks are actually suffering in the stock market.

44:53 So you can see that banks have lost

44:55 almost 20 to 25% more.

44:58 Than the firms,

44:59 and it turns out banks have also lost far more on an index basis from January

45:05 relative to all other

45:07 firms in the financial sector,

45:08 broker dealers,

45:09 insurance,

45:10 security investments.

45:12 And the question is why so,

45:14 and I want to explain that

45:16 these

45:17 contingent credit line drawdowns have been a very big part

45:21 of this higher loss.

45:23 The cumulative drawdowns by the beginning of April,

45:27 were already actually the stress test estimate we had for the whole year,

45:31 so about $250 billion have been drawn down already.

45:35 It is flattening in this month partly because of the stimulus measures.

45:41 Uh,

45:41 and you can see that,

45:43 uh,

45:43 the drawdown rates on the right side for the firms

45:47 that are drawing down

45:49 are actually almost close to now 70 to 80%,

45:52 saying that

45:53 they are also actually reaching the limits of their insurances.

45:59 So what we did in order to ascertain what's causing this bank price corrections,

46:04 we constructed a simple measure of liquidity risk for each bank.

46:08 We looked at unused commitments of bank plus its wholesale

46:12 finance reliance minus its liquid assets divided by total assets.

46:18 Uh,

46:19 and then we separated banks into those that have above median versus below median

46:24 drawdown

46:25 slash

46:26 market freeze risk,

46:28 and you can see that the market has been punishing

46:31 more heavily the firms that have the high liquidity risk.

46:36 You can do this through regressions where you control

46:38 for all kinds of various other characteristics as well.

46:41 It's a good 10 to 12% of an additional liquidity discount.

46:46 In fact,

46:47 my sense is the reason why JPMorgan,

46:49 which looked very strong in January,

46:51 has suffered quite heavily actually in stock price correction

46:54 is because it is one of the most exposed

46:58 to contingent drawdowns on its facilities.

47:01 Um

47:03 Uh,

47:03 in terms of,

47:04 like,

47:05 if you just looked at a simple cross section,

47:08 you can see that there's a fairly steep negative

47:11 line of bank stock return against this liquidity risk.

47:15 And then as I said,

47:15 you can put this into explaining the cross section of the bank returns

47:20 and

47:21 and in general,

47:22 there's a phenomenon I want to come back to,

47:23 which is that these risk exposures are behaving like stress scenarios.

47:28 Both the market exposure,

47:30 the beta,

47:31 and the liquidity risk term that we have,

47:33 as you can see on the red line in January and February,

47:37 the cross-sectional estimates were very close to 0.

47:41 Uh,

47:41 but in March,

47:42 uh,

47:42 it's as though the risks are igniting and the market is

47:45 now actually pricing these risks in the cross section very,

47:48 very severely,

47:50 um.

47:52 Um,

47:53 uh,

47:53 uh,

47:54 a very important part of these drawdowns that

47:56 is being severely punished in the markets.

48:00 is actually the exposure to fossil fuels,

48:02 as you know,

48:04 just on one day,

48:05 on 9th of March,

48:07 there was a very massive correction to oil prices.

48:10 Oil volatility went up from 40% to 100% and actually hasn't subsided.

48:14 If anything,

48:15 it went up even further during the

48:17 settlement issue when the

48:21 WTI crude went negative.

48:24 one minute,

48:24 OK,

48:26 yeah,

48:26 and you see that the oil price correction is also on the right hand side.

48:30 If you just took the exposure to oil,

48:32 that's getting

48:33 a very severe,

48:36 cross-sectional impact in the market.

48:38 Once again,

48:39 it again has this property of getting ignited.

48:42 Not much

48:43 behavior in January and March of the cross-sectional pricing of the risk.

48:47 But especially the oil sector and the liquidity risk,

48:50 and in fact these seem to be priced much more

48:52 than other sectors which are actually much more directly affected

48:56 because bank exposures to these sectors are very,

48:58 very large,

48:59 OK.

49:01 So what should be done?

49:02 My sense is that while it's important to respond

49:05 to the immediate crisis in terms of relief measures,

49:08 I think the Federal Reserve

49:11 and the central banks should waste no time.

49:14 First of all,

49:15 they should preserve bank capital.

49:16 Uh,

49:17 they should,

49:17 uh,

49:19 as a blanket suspend any payouts and capital erosion

49:22 simultaneously.

49:23 They should ask banks to raise capital.

49:25 I think it's not good enough

49:27 what Neel Kashkari,

49:29 uh,

49:29 one of the governors,

49:30 has done in FT,

49:31 which is saying that large banks.

49:32 Banks should raise $200 billion of capital.

49:34 It's just not sufficient.

49:36 There are

49:37 signaling problems that are debt overhang problems.

49:39 I think they need to

49:40 ask banks to raise capital by regulatory fiat.

49:43 They have the powers to do so

49:45 for systemically important financial institutions.

49:48 And I think they can very easily fine

49:50 tune the requirements based on the drawdown risks.

49:54 All that you need to factor in is that there's going to be

49:56 a drawdown rate in the stress scenarios on these lines of credit.

50:00 They're going to hog up capital

50:02 and therefore you can create additional surcharges.

50:06 Why does this need to be done?

50:07 Because you want to ensure that firms that don't have liquidity insurance,

50:11 the small businesses,

50:13 can have access to bank capital

50:15 and are not contaminated

50:17 when the insured actually draw down.

50:19 And of course bank capital requirements can be relaxed.

50:23 Uh,

50:23 I'll skip all this.

50:25 Just a last point on this,

50:26 I think structurally we may have to think

50:29 about climate change stress tests more seriously.

50:33 There is a view in the medical profession

50:36 that the reason why these styles of

50:38 epidemics or pandemics are becoming more frequent.

50:41 it's because animals are actually moving from tropics towards the poles.

50:47 They are not exposed to the same

50:50 viruses and bacteria that they were earlier,

50:53 and through that,

50:53 the zoonotic diseases

50:55 are more likely to hit humanity than they were earlier.

50:59 So I think now we have the pandemic has

51:01 given us a real illustration of how climate change

51:04 can actually play out as a stress test,

51:06 and I think we perhaps need to take this more seriously,

51:09 at least in the financial sector stress tests that we.

51:12 Thank you.

51:13 Sorry for running over.

51:14 No,

51:14 thank you very much,

51:15 Vira.

51:16 Um,

51:16 our next panelist is Thorsten Beck.

51:19 He's professor of banking and finance

51:21 at Casper Business School in London.

51:24 Uh,

51:24 he's a research fellow of CEPR.

51:26 Um,

51:28 most importantly,

51:28 he previously worked in the research department of the World Bank.

51:31 So welcome home.

51:32 15 minutes,

51:33 please.

51:34 Well,

51:35 thank you very much,

51:36 uh.

51:37 Uh,

51:37 Bill,

51:37 uh,

51:38 let me see whether I can upload my

51:39 presentation.

51:41 I think it's this one here,

51:42 yes.

51:44 OK.

51:45 I hope you can see this now.

51:46 Um,

51:47 yes,

51:48 thank you very much for inviting me.

51:50 Um,

51:51 what I'm gonna do is,

51:52 um,

51:52 I'm gonna give a rather broad overview of different topics,

51:56 and as you will see,

51:57 I'm,

51:57 uh,

51:58 gonna touch,

51:59 uh,

51:59 among,

52:00 uh,

52:00 I'm gonna touch on many of the issues already raised by the,

52:03 uh,

52:03 previous,

52:04 uh,

52:04 uh,

52:04 three speakers.

52:05 Um,

52:06 let me also say that,

52:07 um,

52:07 um,

52:08 I will focus mostly but not exclusively.

52:11 on Europe,

52:12 uh,

52:12 maybe give also an additional perspective,

52:14 um,

52:15 to what,

52:15 um,

52:16 um,

52:16 uh,

52:17 the,

52:17 uh,

52:17 Marcos have already mentioned,

52:19 uh,

52:19 with respect to the US,

52:21 and then at the very end,

52:21 I'm gonna make some,

52:22 uh,

52:23 remarks,

52:23 but these are really more like thoughts,

52:25 I would say at this stage

52:27 about the situation in developing the emerging markets

52:29 coming also back to the theme that,

52:30 uh,

52:30 uh,

52:31 Sergio already mentioned.

52:32 Um,

52:34 Right,

52:34 good.

52:35 So,

52:35 um,

52:37 Marcus already referred to this,

52:38 the,

52:38 the difference between the great financial crisis,

52:40 the great lockdown.

52:41 Um,

52:42 yes,

52:42 this crisis did not start in the financial sector,

52:45 but of course,

52:46 the financial sector will be

52:47 affected negatively as,

52:49 uh,

52:49 many,

52:49 if not most other sectors.

52:52 However,

52:52 of course,

52:53 we also know that the bank financial sector,

52:55 especially the banking sector,

52:56 can be critical in in determining whether,

52:59 um,

53:00 there will be a relatively speedy recovery,

53:02 at least,

53:03 uh,

53:03 not maybe V shape anymore,

53:04 but at least U shape,

53:06 or whether it actually will turn into something even worse,

53:09 um,

53:09 which I will come back into a moment.

53:11 Um,

53:12 now again,

53:12 coming mostly from the,

53:14 um,

53:16 European perspective,

53:17 um,

53:18 I would argue that the reaction of prudential monetary policy makers has been

53:25 quite,

53:25 um,

53:26 uh,

53:26 speedy,

53:27 quite quick,

53:27 uh,

53:28 quite effective,

53:28 I would say.

53:30 Um,

53:30 and we have maybe also gained a little bit from

53:34 what has happened over the last 10 years and,

53:35 uh,

53:35 as a consequence of the,

53:37 the global financial crisis.

53:38 So the regulatory reforms,

53:40 um,

53:40 the Basel 3.

53:42 Uh,

53:42 reforms have certainly strengthened the capital buffers,

53:44 um,

53:45 that's very clear.

53:46 Um,

53:47 we also have much more data available now to actually monitor the,

53:51 uh,

53:51 situation.

53:51 Uh,

53:51 I'm not sure whether that might have been so easy actually for,

53:54 for example,

53:54 if you had to do an analysis

53:57 as he just did,

53:57 uh,

53:58 um,

53:58 uh,

53:59 12 years ago.

54:00 Um,

54:01 I would also argue that the experience of crisis management.

54:04 Um,

54:05 has also enabled,

54:06 uh,

54:06 the quick reaction that we saw this time around,

54:09 especially in the prudential area,

54:11 um,

54:12 where,

54:13 uh,

54:13 I think,

54:13 uh,

54:13 12 years ago,

54:14 the reaction was much,

54:15 uh,

54:16 more,

54:16 much slower,

54:17 and of course also much more uncoordinated.

54:20 Um,

54:21 finally,

54:21 um,

54:22 I I think the framework for international cooperation is,

54:24 uh,

54:24 is good,

54:25 maybe even better than it used to be.

54:26 In Europe,

54:27 it's definitely much better.

54:28 Although with the caveat I'm gonna come back to in a moment,

54:31 um,

54:31 the question,

54:31 of course,

54:32 is being,

54:32 is it also being used,

54:34 and they actually are much more skeptical,

54:36 and I'm gonna come back to this when I talk about,

54:37 uh,

54:38 payout restrictions in just a moment.

54:40 Um,

54:41 Now I think,

54:42 uh,

54:42 as I just mentioned,

54:43 uh,

54:43 I think the uh the,

54:45 the crisis did not start in the financial sector very obviously,

54:48 but there is a kind of um,

54:51 I'm not sure whether I call it tail risk or there is definitely a risk,

54:54 a non-zero

54:55 risk

54:56 that this economic crisis might actually turn into a deeper crisis,

54:59 uh,

54:59 especially,

55:00 uh,

55:00 here in Europe,

55:01 be it the banking crisis or in the worst case scenario sovereign debt crisis,

55:04 or I may add,

55:05 uh,

55:06 actually also another political crisis which might be related to these two issues,

55:10 um,

55:10 which I think we should not

55:11 forget.

55:13 Um,

55:14 now,

55:16 Banks,

55:16 um,

55:17 and I think,

55:18 uh,

55:18 Sergio already alluded to this,

55:19 and of course,

55:20 the,

55:20 uh,

55:20 um,

55:21 suggestion by,

55:21 uh,

55:22 Marcus,

55:22 uh,

55:22 kind of also goes this line,

55:24 goes this way,

55:25 um,

55:26 can be very helpful,

55:28 um,

55:28 during the great lockdown,

55:31 and they can also help during the recovery phase.

55:35 Um,

55:37 so as Viral already,

55:37 um,

55:38 uh,

55:38 showed,

55:39 there has been a heavy drawdown of credit lines.

55:42 There has been also generally an increase in credit demand,

55:45 or ECB,

55:45 uh,

55:46 uh,

55:46 got out some data yesterday

55:48 that showed exactly the,

55:49 uh,

55:49 quite,

55:49 uh,

55:50 dramatic increase in the credit demand over the last,

55:52 uh,

55:52 quarter.

55:53 Um,

55:53 now I would also argue that,

55:54 um,

55:55 uh,

55:55 the kind of relates to some previous research I've done,

55:58 uh,

55:58 and all the other people,

55:59 um,

55:59 that banking systems.

56:01 where banks rely on relationships between lenders and borrowers are actually

56:05 in a relatively good position to help their clients right now,

56:08 and I think we've seen some of these examples in the continental Europe.

56:13 Banks,

56:14 of course,

56:14 do have a critical role in the transmission of monetary policy,

56:17 we know this already,

56:18 but now also especially during this crisis in

56:20 fiscal

56:22 support measures

56:24 and

56:25 so some of them have been already mentioned.

56:27 I want to

56:28 Briefly talk about one of them,

56:29 very specific one on the

56:31 credit guarantee schemes,

56:32 uh,

56:32 that have been,

56:33 uh,

56:34 used,

56:34 um,

56:35 in

56:36 several European countries,

56:37 um,

56:38 or maybe outside.

56:39 Um,

56:40 of course,

56:40 the question,

56:41 when we talk about these guarantee schemes,

56:43 is,

56:43 um,

56:44 is that really the right instrument?

56:46 Um,

56:47 to which extent are these liquidity or solvency,

56:49 uh,

56:50 problems,

56:50 and to which extent will firms actually be able to repay them?

56:54 Um,

56:55 is it just for existing loans

56:58 or existing credit lines,

56:59 or is it for new loans that,

57:00 uh,

57:01 clients might need

57:02 to get over tough times?

57:03 Then of course,

57:03 again,

57:04 the question arises,

57:04 will they ever be able to pay it back?

57:07 Um,

57:08 We have two models here in Europe.

57:10 Uh,

57:10 the Swiss model has been,

57:12 um,

57:12 I mean,

57:12 maybe seen the FT article,

57:14 has been kind of praised as a 100% coverage ratio,

57:17 so 100% government guarantee,

57:19 and of course,

57:20 as we know,

57:20 the Swiss are always effective and they are always over punctual,

57:23 so the money basically arrived within a couple of hours,

57:26 uh,

57:27 as opposed to the UK.

57:28 Which started with an 80% coverage ratio,

57:31 so still having skin in the game for the banks,

57:34 but then also a much,

57:36 much slower push out of these loans where basically now the Treasury has done a

57:41 180 degree turn and is now pushing Asia

57:43 also for 100% guarantees for smaller enterprises.

57:48 Now the one point I want to make is that,

57:50 um,

57:51 when we come out of the crisis,

57:52 so this is not exactly a freezer situation,

57:55 that's what many of us thought,

57:56 including me,

57:57 but of course,

57:58 uh,

57:58 some,

57:58 uh,

57:59 uh,

57:59 companies will thaw very quickly and get back on their feet very quickly,

58:03 others will take a much,

58:04 much longer time.

58:06 I mean,

58:06 Norwegian Air.

58:07 For example,

58:08 some of you might know them,

58:09 they don't see any of their planes flying until next year,

58:11 actually.

58:12 And of course there will be also a sectoral shift.

58:16 Some sectors will definitely be on the losing side.

58:18 Some sectors might be actually on the on the winning side.

58:21 So the question is really

58:23 Uh,

58:24 in the short term,

58:25 yes,

58:25 it is all about survival,

58:27 as,

58:28 uh,

58:28 um,

58:28 as Marcus pointed out.

58:30 In the end,

58:30 of course,

58:31 um,

58:31 we do wanna have the banking system coming back as kind of,

58:34 uh,

58:35 supporting the capital reallocations.

58:36 We don't wanna create more zombie companies.

58:39 And that's a Of course an issue that has to be addressed eventually

58:42 plus of course the

58:45 losses that ultimately to a large extent the government will have to bear,

58:49 which of course then brings me back to the the worst case scenario of

58:54 sovereign debt fragility.

58:56 Um,

58:56 and of course in the general question,

58:58 and I think,

58:58 uh,

58:58 also,

58:59 um,

58:59 I think Marcus was,

59:00 uh,

59:00 mentioned that the,

59:02 how to deal with widespread corporate failure post lockdown.

59:05 I'm not sure whether the,

59:06 I mean,

59:06 we know from emerging market crisis that

59:08 the corporate restructuring programs might help.

59:10 I don't think that has,

59:12 I'm not sure it has been tried in,

59:13 uh,

59:13 in,

59:13 in Europe yet.

59:15 Um,

59:16 Now,

59:16 as I mentioned earlier,

59:17 I think the reaction of regulators in Europe has been really quite effective,

59:21 quite swift,

59:23 and he actually has shown that the capital buffer that has been built up

59:27 over the past 10 years,

59:29 um,

59:29 have helped in a sense they can now be released.

59:32 So for example,

59:33 the

59:34 SSM released the capital conservation buffer and They

59:37 also allowed banks to go below the capital,

59:39 uh,

59:40 under,

59:40 uh,

59:41 Pillar 2 guidance.

59:42 Some,

59:42 um,

59:43 of the

59:44 national regulators,

59:45 um,

59:46 reduced the countercyclical capital buffer to zero.

59:49 surprisingly to my,

59:50 to,

59:50 to me,

59:51 surprisingly,

59:51 many countries actually had still 0%,

59:53 so they couldn't,

59:54 uh,

59:54 release anything.

59:55 But unlike in the US,

59:57 um,

59:59 European regulators have called for the suspension of any payouts,

1:00:02 dividends,

1:00:02 share buybacks,

1:00:03 and possibly also even bonuses.

1:00:05 So here I think the Europeans have been a little bit ahead of the game.

1:00:08 Both SSM,

1:00:09 EBA,

1:00:10 and even IOA,

1:00:11 which is the

1:00:12 insurance equivalent to the EBA,

1:00:14 to the European Banking Authority,

1:00:15 have called for that

1:00:17 for a very obvious reason that already mentioned.

1:00:20 They have of course been even steps further during the last couple of days

1:00:24 and easing on the New provisioning rules,

1:00:26 uh,

1:00:26 on IFRS 9,

1:00:29 also a moratorium,

1:00:30 and I think that's on the global level on further regulatory reforms.

1:00:33 Um,

1:00:33 of course,

1:00:34 um,

1:00:34 I'm here,

1:00:35 I'm,

1:00:35 um,

1:00:36 I'm getting a bit skeptical.

1:00:37 I mean,

1:00:37 I know that,

1:00:38 uh,

1:00:38 Marcus pointed to this kind of,

1:00:39 uh,

1:00:39 we want to have,

1:00:40 uh,

1:00:40 evergreening right now.

1:00:42 Do we also want to have a loss of transparency?

1:00:44 That's a bit of an issue.

1:00:45 Um,

1:00:46 again,

1:00:46 for the next 3 months,

1:00:47 yes,

1:00:47 longer term,

1:00:48 that's,

1:00:48 um,

1:00:49 a bit of a,

1:00:50 a big,

1:00:50 uh,

1:00:51 question.

1:00:53 Um

1:00:55 Sorry,

1:00:55 now,

1:00:57 look,

1:00:57 all of this capital relief and the changes in provisioning standards will not

1:01:01 avoid the losses,

1:01:02 that is for sure.

1:01:03 So the losses will incur,

1:01:05 um,

1:01:05 they will also vary a lot,

1:01:07 of course,

1:01:07 across sectors and therefore across banks and countries.

1:01:11 Um.

1:01:12 Banks in,

1:01:12 at least in Europe have already been under a lot of pressure.

1:01:15 I mean,

1:01:15 if you look at the market valuation of European banks compared to US banks,

1:01:19 um,

1:01:19 they look much worse anyway,

1:01:21 and,

1:01:21 uh,

1:01:21 I think they will come under more pressure

1:01:23 because interest rates will stay probably around 0 or negative for even longer now,

1:01:28 and

1:01:28 the,

1:01:29 the,

1:01:29 the competition from big tech is of course already strong,

1:01:32 and I think the big tech company will be probably one sector.

1:01:34 will come out quite strongly from this,

1:01:37 uh,

1:01:37 uh,

1:01:37 from this crisis.

1:01:39 Um,

1:01:39 here in Europe,

1:01:40 um,

1:01:41 I am particularly worried about,

1:01:42 um,

1:01:43 what to do if there are more than a few failing banks.

1:01:47 We know that the bank resolution framework

1:01:49 as it currently exists in the banking union

1:01:51 can work with idiosyncratic

1:01:54 bank failures,

1:01:55 but not quite,

1:01:56 uh,

1:01:56 for systemic.

1:01:57 bank failures.

1:01:58 I mean,

1:01:59 that's why even the

1:02:00 EBA has now started with plans for like a bad bank,

1:02:04 certain recapitalization efforts

1:02:06 very obviously

1:02:08 similar to other efforts,

1:02:09 this would have to be done at least at the euro area level,

1:02:12 if not at the EU level,

1:02:13 given that,

1:02:14 otherwise you would get again the spiral downward spiral of sovereign bank

1:02:19 fragility.

1:02:21 Um,

1:02:22 two,

1:02:23 more issues I want to briefly mention.

1:02:25 There is,

1:02:25 um,

1:02:26 there's an issue on,

1:02:27 um,

1:02:28 um,

1:02:29 cross-border spillover effects.

1:02:31 Um,

1:02:32 now,

1:02:32 very specifically in the single market,

1:02:35 which is the EU plus,

1:02:36 uh,

1:02:37 Liechtenstein,

1:02:38 Iceland,

1:02:38 and,

1:02:39 uh,

1:02:40 uh,

1:02:40 Norway plus,

1:02:40 of course,

1:02:41 until the end of the transition period of the UK,

1:02:43 there's a principle of free capital movement,

1:02:46 which Which means that banks should be able to allocate their,

1:02:49 their capital within the single market as much as they want,

1:02:52 including,

1:02:53 uh,

1:02:53 um,

1:02:54 paying out dividends from subsidiaries to their parent banks,

1:02:57 which is not covered,

1:02:58 by the way,

1:02:58 by the EBA or SSM,

1:03:00 uh,

1:03:00 uh,

1:03:00 recommendation.

1:03:01 Um,

1:03:02 that's on the one hand.

1:03:04 On the other hand,

1:03:05 um,

1:03:05 there is the fear,

1:03:06 especially in smaller host countries,

1:03:08 such as in,

1:03:08 uh,

1:03:09 countries like the Fintech countries and,

1:03:11 uh.

1:03:11 Central,

1:03:12 Eastern,

1:03:12 southeastern Europe,

1:03:13 that there will be capital outflows such as in 2008,

1:03:16 2009,

1:03:17 um,

1:03:17 especially again in countries which are heavily reliant on cross-border banks.

1:03:20 And there is,

1:03:21 of course,

1:03:21 the risk of kind of a,

1:03:23 um,

1:03:23 an arms race to regulatory ring-fencing.

1:03:26 Um,

1:03:26 now this,

1:03:27 uh,

1:03:27 the good news is it has been,

1:03:28 this is being addressed,

1:03:29 I would argue,

1:03:30 although somewhat slowly,

1:03:31 but there are seem to be efforts,

1:03:33 uh,

1:03:33 in,

1:03:33 on the way,

1:03:34 for example,

1:03:35 for another version of the Vienna.

1:03:36 Initiative to kind of,

1:03:37 uh,

1:03:37 get everybody around the table,

1:03:39 um,

1:03:40 and,

1:03:40 I guess under the theme of maintaining the single market while

1:03:43 making it work for everybody.

1:03:44 Now this,

1:03:45 of course,

1:03:45 has implications also for the developing emerging world,

1:03:48 where these issues,

1:03:49 both on the cross-border bank level exist,

1:03:51 but of course,

1:03:52 also

1:03:53 the broader implications of capital flows,

1:03:55 which kind of gets me a little bit out of my brief because it's more macro,

1:03:58 I guess,

1:03:58 than,

1:03:58 uh,

1:03:59 than,

1:03:59 uh,

1:04:00 strictly speaking,

1:04:01 finance.

1:04:02 Now,

1:04:02 let me use my,

1:04:03 I think last 3 minutes or so to just

1:04:06 touch upon a couple of issues,

1:04:08 um,

1:04:09 for,

1:04:09 on developing emerging markets.

1:04:11 And I think I'm,

1:04:11 I'm talking actually more about developing markets.

1:04:13 Um,

1:04:14 so,

1:04:14 um,

1:04:15 lower middle to low-income countries.

1:04:17 Um,

1:04:17 so I guess the good news is that,

1:04:19 um,

1:04:20 unlike in advanced countries,

1:04:22 in some,

1:04:23 not all,

1:04:23 and many I would say,

1:04:24 not all of the developing countries,

1:04:26 banks are typically better capitalized,

1:04:28 but they're also less diversified.

1:04:30 And of course that's especially a concern in uh natural

1:04:33 resource based economies as we've already seen in Nigeria,

1:04:36 for example.

1:04:37 Now,

1:04:37 of course,

1:04:37 you can also know that the financial system is somewhat

1:04:40 less relevant

1:04:41 for better or worse,

1:04:42 maybe in this case for better

1:04:43 in many of these countries.

1:04:45 So there might be less of an effect,

1:04:46 uh,

1:04:47 less,

1:04:47 less of a reliance on the banking sector,

1:04:49 but also less of a negative effect on the banking sector.

1:04:52 Um,

1:04:53 Having said this,

1:04:54 um,

1:04:55 there are increasingly and partly also due to mobile money and to

1:05:00 mobile,

1:05:00 mobile payment system,

1:05:01 more and more countries,

1:05:02 even lower middle income countries

1:05:04 that have seen kind of a consumer credit boom recently,

1:05:07 and that might of course be a definitely a big source of fragility.

1:05:11 Um,

1:05:11 let me maybe not talk much about the sovereign default risk.

1:05:14 Um,

1:05:14 um,

1:05:15 just point to the fact that,

1:05:16 um,

1:05:17 uh,

1:05:17 I think the,

1:05:17 the,

1:05:18 the Chinese,

1:05:18 uh,

1:05:18 debt will have certainly a big role,

1:05:21 certainly in Africa and some other,

1:05:23 uh,

1:05:23 Asian countries.

1:05:24 Um,

1:05:24 let me finish here on a positive note.

1:05:27 Um,

1:05:27 I think,

1:05:28 um,

1:05:28 we might actually see a,

1:05:30 uh,

1:05:30 dividend,

1:05:31 another dividend on The

1:05:33 mobile phone banking networks or the mobile banking networks that have

1:05:37 emerged over the last 10 years or so.

1:05:39 Number one,

1:05:40 we know that from researchers in Rwanda,

1:05:43 for example,

1:05:44 when shocks hit

1:05:46 these mobile phone networks,

1:05:47 these mobile banking networks can be used for risk sharing within the families or

1:05:52 friend networks.

1:05:54 And number 2,

1:05:55 these might,

1:05:56 these mobile money networks might also serve actually for easier,

1:06:00 speedier and more effective,

1:06:01 meaning,

1:06:01 uh,

1:06:02 more targeted,

1:06:02 better targeted push out of government

1:06:04 support programs in many developing countries.

1:06:06 I think that's,

1:06:07 uh,

1:06:07 what I want to say on the,

1:06:08 uh,

1:06:09 on the,

1:06:09 on a positive note.

1:06:11 There's much more to say about developing countries,

1:06:12 which I don't have the time and certainly my thinking hasn't,

1:06:15 uh,

1:06:16 uh,

1:06:16 really finished on that one.

1:06:17 So let me just,

1:06:18 in summary,

1:06:19 um,

1:06:21 And I also talk a little bit about politics,

1:06:22 um,

1:06:24 So the initial reaction,

1:06:25 policy reaction was certainly very welcome,

1:06:27 I would argue,

1:06:28 especially in in Europe.

1:06:29 I mean,

1:06:29 that's the one

1:06:30 region I know,

1:06:31 I,

1:06:31 I'm observing best and monitoring best right now.

1:06:34 However,

1:06:35 I think such as with any crisis,

1:06:37 there is some very,

1:06:38 very hard work ahead of uh for the policymakers.

1:06:41 Um,

1:06:41 how to restart the economy.

1:06:43 And how to allocate the losses.

1:06:46 And I think there will be some very hard political choices to be made,

1:06:49 um,

1:06:50 which

1:06:51 gets of course us back to the whole discussion also on populism,

1:06:53 which might show again its ugly face in some of the countries.

1:06:56 So,

1:06:57 um,

1:06:58 do we need another bailouts?

1:06:59 I mean,

1:06:59 uh,

1:07:00 the corporate sector,

1:07:01 certainly.

1:07:02 I mean,

1:07:02 some airlines definitely need would need that.

1:07:04 Um,

1:07:05 do we need again bailouts in the in the banking system?

1:07:07 I mean,

1:07:08 we said we never would do this again,

1:07:09 right?

1:07:10 Do we have to do it again?

1:07:12 Um,

1:07:12 state aid for firms

1:07:14 that don't pay taxes because the headquarters in tax havens.

1:07:17 Some countries in Europe have already come up with laws where they say basically,

1:07:20 well,

1:07:20 if you're in a tax haven,

1:07:22 no chance you're going to get any support from us.

1:07:24 I think that's probably the right way to go.

1:07:27 At least in Europe,

1:07:28 maybe even broader,

1:07:30 ultimately will there be some transfers,

1:07:31 even if only indirectly across countries,

1:07:34 because we know that some countries have been hit much harder,

1:07:37 partly also because they have been hit earlier and therefore

1:07:39 had less time to react and to learn from other countries

1:07:43 than some latecomers.

1:07:45 And of course the whole question on the taxation,

1:07:47 the wealth tax,

1:07:48 be it income or wealth taxation,

1:07:50 I don't think there's any appetite,

1:07:52 at least not in Europe,

1:07:52 for any,

1:07:53 for another round of austerity,

1:07:56 and we certainly do want to avoid another financial and sovereign

1:08:00 debt crisis that we had after the global financial crisis.

1:08:02 But again,

1:08:02 so this will be

1:08:04 a very tough choices.

1:08:07 On one note,

1:08:08 um,

1:08:09 I remember from the uh,

1:08:11 the conversation of Marcus actually with,

1:08:12 uh,

1:08:13 uh,

1:08:13 Olivier Blanchard the other day,

1:08:15 um,

1:08:15 that,

1:08:16 uh,

1:08:16 Olivier made the,

1:08:17 Olivier made a very valid point that macroeconomically speaking,

1:08:20 at the zero lower bound,

1:08:21 uh,

1:08:21 there's not really that much difference

1:08:23 anymore between fiscal and monetary policy.

1:08:25 And what we see right now is that,

1:08:27 uh,

1:08:27 as,

1:08:28 uh,

1:08:28 over the past 12 years,

1:08:29 the ECB He is taking again the hard work,

1:08:32 the hard burden

1:08:33 to address the current crisis and to keep the eurozone together.

1:08:37 Ultimately I think there are choices to be made not by central bankers,

1:08:40 not by technocrats,

1:08:42 not by regulators,

1:08:43 but by politicians as they are the ones directly accountable to the people,

1:08:47 and I think that will be again there will be some hard choices

1:08:51 ahead of everybody.

1:08:53 Thank you.

1:08:56 Thank you,

1:08:56 Torsten.

1:08:57 Um,

1:08:57 finally,

1:08:58 we have,

1:08:58 uh,

1:08:59 to offer additional comments and some synthesis,

1:09:01 uh,

1:09:02 Alfonso Garcia Mora,

1:09:03 who is Global director for finance in

1:09:06 EFI,

1:09:07 um,

1:09:08 so over to you,

1:09:09 Alfonso.

1:09:12 Thank you very much,

1:09:13 uh,

1:09:14 Bill,

1:09:14 and,

1:09:14 uh,

1:09:15 it's a pleasure to,

1:09:16 to be part of this,

1:09:17 uh,

1:09:17 panel,

1:09:18 amazing panel.

1:09:19 I think I have really enjoyed

1:09:21 the presentation of,

1:09:22 uh,

1:09:22 of,

1:09:23 uh,

1:09:23 of,

1:09:23 uh,

1:09:23 of,

1:09:24 uh,

1:09:24 the 4 presentations that we had before.

1:09:26 And actually I find some joint

1:09:30 or or similar

1:09:33 trends or messages in many of the,

1:09:35 from many of the speakers,

1:09:37 but also some nuances on some of the of the recommendations,

1:09:40 not that maybe are good if we have time,

1:09:43 it would be good to,

1:09:44 to discuss a little bit more.

1:09:46 I think that there is a,

1:09:47 there is a first point which is this dilemma that we have.

1:09:51 Beginning of the crisis,

1:09:53 not saving firms versus saving households.

1:09:57 How far should we go with firms,

1:09:59 or should we focus on livelihoods?

1:10:01 But I think that there is evidence and I think that

1:10:05 all of us

1:10:06 think that actually saving firms is a way of

1:10:08 ensuring that the economy can also recover

1:10:12 more productively in the next phase.

1:10:17 The second one,

1:10:18 which I fully agree as well,

1:10:19 also is the current infrastructure was not prepared for this crisis.

1:10:23 I mean,

1:10:23 it was totally

1:10:26 impossible to predict something like that,

1:10:28 and we were not prepared for this.

1:10:30 And therefore this is all this comes to all

1:10:32 the extraordinary measures that we need to take.

1:10:37 The idea of firms to hibernate,

1:10:39 I think is very,

1:10:40 it's a very strong idea.

1:10:41 It's

1:10:43 interesting.

1:10:43 The issue is,

1:10:44 to me there are

1:10:45 two questions here at least,

1:10:47 but I will come back with the questions later on.

1:10:49 One is

1:10:51 for how long?

1:10:52 I mean,

1:10:52 how long can we keep

1:10:54 the

1:10:55 firm,

1:10:55 firms on hibernation

1:10:57 and what are the

1:10:59 consequences that it may have

1:11:02 down the road linking to what Tom.

1:11:03 As Torsten was mentioned in terms of financial sector stability,

1:11:08 no,

1:11:08 and I think that this is key because one thing is to keep the

1:11:12 financial or the firms in the nation but during a couple of months,

1:11:15 and another one is to think that this is going to actually

1:11:18 take us or take us for 1010,

1:11:21 10 months or 1 year,

1:11:22 and maybe the consequences are very different.

1:11:25 But also in terms of how do we do that,

1:11:27 I think that there are 3 key issues.

1:11:30 One is

1:11:31 We need to provide financing so credit flows,

1:11:34 and here I think that there is a very big discussion on targeting,

1:11:38 which is

1:11:39 non-trivial discussion.

1:11:41 Because

1:11:41 targeting,

1:11:42 even if we want to target,

1:11:43 it is not easy to target because we don't have information to target in many cases,

1:11:48 because

1:11:49 how do you set the principles for the targeting?

1:11:52 I mean,

1:11:52 are those firms that are more affected,

1:11:54 are those firms that could be more affected,

1:11:56 are those firms that were more affected?

1:11:58 So

1:11:59 it is not easy to define what is the criteria for the targeting

1:12:01 and even less to have the information needed to really do it properly,

1:12:05 no.

1:12:06 But second and probably before even the targeting is

1:12:10 how to reach out to that part of the productive

1:12:14 economy,

1:12:15 especially in developing countries that is informal,

1:12:17 because we know that actually not so many firms have access

1:12:20 to the financial sector or to the traditional financial sector,

1:12:23 and therefore it may

1:12:25 complicate significantly the situation.

1:12:28 But third

1:12:29 is the uh vulnerabilities that uh Sergio was also mentioned,

1:12:33 not the initial vulnerabilities that we have and that we face in many countries.

1:12:37 So when thinking of

1:12:38 keeping the credit closes or what we call in,

1:12:42 in FCI in our team,

1:12:43 uh,

1:12:44 keeping the lights on,

1:12:45 uh,

1:12:46 this is,

1:12:46 this is not,

1:12:47 it's not so easy a

1:12:49 a question of how to implement it,

1:12:51 no?

1:12:51 First,

1:12:52 uh,

1:12:52 basically because maybe

1:12:54 you cannot target all

1:12:56 and therefore you need to decide.

1:12:57 Uh,

1:12:58 where are you going to put your resources?

1:13:01 And second,

1:13:02 because I think that the key question,

1:13:04 and I will come back in a minute to that,

1:13:05 in this crisis is

1:13:08 how are we gonna

1:13:10 Distribute the losses.

1:13:11 Who is going to take the economic losses of this crisis?

1:13:14 Uh,

1:13:14 and this is very important,

1:13:16 especially for developing countries.

1:13:19 The second piece of the implications of the firms to

1:13:22 n is the forbearance and not related to forbearance,

1:13:25 evergreening,

1:13:25 or however you want to call it,

1:13:27 which we know that depending on how you do it,

1:13:29 it may have significant consequences down the road

1:13:32 and therefore the design of any of these activities

1:13:35 is absolutely critical.

1:13:37 And the third one is this idea of survival versus creating zombies,

1:13:42 and

1:13:44 when the rapid implementation or the stability.

1:13:49 If there really exists a trade-off uh among these uh among these uh uh issues,

1:13:54 no,

1:13:54 so I have just,

1:13:55 I have prepared a very brief uh presentation.

1:13:58 I don't know how.

1:14:03 OK.

1:14:06 OK,

1:14:07 so let me,

1:14:07 let me go to,

1:14:08 to the brief presentation that I have prepared

1:14:11 because one of the things that we had in mind when in,

1:14:15 in FC

1:14:16 when we decided support in terms of resilience

1:14:19 is that

1:14:21 the objective function

1:14:22 is quite clear,

1:14:25 but there are two big questions.

1:14:26 One is

1:14:28 If we should,

1:14:29 if the policies should be different depending on who are you targeting,

1:14:33 and policies for informal firms will be different from micro and small firms,

1:14:37 and this will be different from large firms,

1:14:38 and this will be different from state-owned enterprises.

1:14:42 So

1:14:42 at the country level,

1:14:43 we need to differentiate between the typology of firms that we think

1:14:48 that we want to support or that we want to help.

1:14:51 And there is a huge

1:14:53 restriction or constraint in this model,

1:14:55 which is the fiscal and the financial sector capacity of the countries.

1:15:00 And I'm saying that because when I was

1:15:03 drafting or thinking on my presentation this morning,

1:15:06 I thought,

1:15:06 OK,

1:15:07 in terms of discussion,

1:15:08 the issue to me is,

1:15:10 as I mentioned before,

1:15:11 should policies target all firms?

1:15:13 Probably

1:15:14 we don't have capacity to.

1:15:15 Does it matter that theology of firm?

1:15:17 We think it does.

1:15:18 The market structure matters

1:15:20 informal,

1:15:22 formal and size.

1:15:23 But also sectorial.

1:15:25 Third,

1:15:26 is it a question of liquidity or solvency?

1:15:28 Because

1:15:28 many of the decisions and policies that we were mentioning before,

1:15:33 like,

1:15:34 like for instance,

1:15:35 doing repo financing with the central bank,

1:15:37 the final or the main issue here is who is taking the risk.

1:15:40 I mean,

1:15:41 if there is a default,

1:15:42 who is supporting this this this this.

1:15:46 This trade flow,

1:15:47 who's taking the loss,

1:15:48 no?

1:15:48 And here is where the restrictions of the model come.

1:15:51 First of all,

1:15:51 how can emerging markets and developing economies

1:15:54 design policies

1:15:56 with much less fiscal,

1:15:57 monetary and financial space than advanced economies.

1:16:00 And this is the elephant in the room for us at the World Bank these days,

1:16:03 because we know that what Europe has done cannot be done by many or most

1:16:08 of the developing economies because they don't have the fiscal capacity to do that.

1:16:11 They don't even have the monetary capacity

1:16:13 to actually expand the central bank balances

1:16:15 to provide part of the monetary stimulus that has taken place in other countries,

1:16:21 and exactly the same with the US.

1:16:22 So how do we design

1:16:24 an optimal policy package

1:16:26 with this restriction in the model?

1:16:29 And second,

1:16:29 because many of the developing economies have

1:16:33 significant vulnerabilities before the crisis started,

1:16:35 vulnerabilities in terms of weaknesses in the banking sector

1:16:39 because of the bank sovereign elections,

1:16:41 huge bank sovereign elections,

1:16:42 and therefore

1:16:44 a very important potential negative feedback loop down the road

1:16:48 because they have a very high corporate indebtness and therefore

1:16:52 much more limited capacity to continue

1:16:55 getting or absorbing more debt.

1:16:59 So in that,

1:17:00 in that.

1:17:01 To me that's the question that I would like to bring back to the to the speakers,

1:17:06 how to design policies and how your your

1:17:09 your actually your

1:17:11 proposal

1:17:12 fits or could be applied to developing economies.

1:17:15 I'm not going to talk about the day after because to me,

1:17:17 one of the big things that we will have and we

1:17:19 will need to do many more webinars in the future is

1:17:22 how credit risk is going to change going forward,

1:17:25 because I think that this crisis is going to change many parameters

1:17:28 of of the of of trade assessment.

1:17:30 And,

1:17:31 and just to finalize before going back,

1:17:34 I think that there is,

1:17:35 uh,

1:17:35 I just wanted to flag

1:17:37 what countries are doing.

1:17:39 So we are trying to monitor what countries are doing around the globe,

1:17:43 uh,

1:17:43 both to support firms

1:17:45 and

1:17:46 through financial sector policies.

1:17:48 And uh just to show you a couple of graphs,

1:17:50 in terms of SME support,

1:17:52 this is based on almost close to 1000 measures taken by 120 countries in the world.

1:17:58 If you see,

1:17:59 uh,

1:18:00 more or less 1/3 of the policies have been focused on debt finance,

1:18:05 so basically supporting financing of the firms,

1:18:09 but actually a very similar percentage has

1:18:13 been focused on employment support and also tax

1:18:15 relief has been a very important part of the of the of the measures taken.

1:18:20 But when you differentiate by income of the country,

1:18:23 it is quite interesting because actually those low income.

1:18:27 Countries are the ones who are focusing much more on debt financing

1:18:31 whether high income or high middle income

1:18:33 countries are using employment support or tax relief

1:18:36 to actually support firms,

1:18:38 which is quite an interesting different approach

1:18:42 from one and another typology of countries.

1:18:45 This in terms of firm support,

1:18:47 but when we look at the financial sector support again

1:18:51 based on

1:18:52 150 to 150 countries,

1:18:56 what they have decided

1:18:58 so far,

1:18:59 you can see that most of the

1:19:02 actions have been

1:19:04 related to prudential measures,

1:19:06 liquidity and prudential measures.

1:19:07 These are the two big areas where regulators are focusing these days,

1:19:13 and actually the

1:19:15 Split by region is very similar,

1:19:17 so prudential measures,

1:19:18 there are more than 100 countries that have already taken actions and decisions

1:19:22 on a prudential regulation

1:19:25 to try to support the economy,

1:19:27 and it goes across the,

1:19:29 across regions.

1:19:30 But when we think about,

1:19:31 OK,

1:19:32 these prudential measures,

1:19:33 more than 100 countries,

1:19:34 what are we talking about?

1:19:36 Are we talking about those measures that are

1:19:38 what we call bucket one,

1:19:40 so basically measures

1:19:41 that make use of existing flexibility in the prudential framework,

1:19:45 like Thorstein was mentioning in Europe,

1:19:48 no?

1:19:48 So basically,

1:19:50 releasing capital buffers,

1:19:52 conservation buffers,

1:19:53 countercyclical buffers,

1:19:55 or easing other macroprudential measures,

1:19:57 etc.

1:19:57 So those are actually we have been designing.

1:20:00 When drafting the regulations in the previous years,

1:20:03 or are they going to the second bucket of measures

1:20:07 which are the ones that we say can be used at the discretion of

1:20:10 the regulator and supervisor and go beyond

1:20:12 the flexibility foreseen in the existing framework,

1:20:15 but which do

1:20:16 contradict the spirit or the principles of global prudential standards,

1:20:21 and here there are a significant number of countries that are taking decisions,

1:20:24 especially related to support and facilitating restructuring of loans,

1:20:28 which can be kind of

1:20:30 evergreening or forbearance that we were mentioning before.

1:20:33 But if we go to the third bucket,

1:20:35 which is the

1:20:36 Extraordinary one.

1:20:38 This is the one that relates

1:20:40 to totally unprecedented regulatory forbearance measures.

1:20:43 So basically things

1:20:44 that we

1:20:45 didn't have in our regulation and that we were not,

1:20:48 this is like what

1:20:49 what Sergio was mentioning,

1:20:51 the infrastructure was not prepared.

1:20:52 OK,

1:20:52 these are the new things that actually we are bringing to the regulatory framework

1:20:56 to try to deal with the current situation.

1:20:58 And here is what I would like to flag the attention of,

1:21:01 and I would like to get your views,

1:21:02 because if you look at the table,

1:21:05 60 countries in the world,

1:21:06 actually 70 countries in the world are doing either

1:21:09 credit repayment moratoriums

1:21:11 or relaxing days past due norms for NPE classification

1:21:16 or are not traditionally accordingly to the norms.

1:21:18 So this is non-trivial,

1:21:20 especially in developing countries,

1:21:21 because we know that these type of decisions can

1:21:24 have a very negative impact on the road,

1:21:27 and there are you wrap up the countries were,

1:21:28 yeah,

1:21:29 so this is what I would like to finalize.

1:21:31 So my two big things

1:21:33 or points are,

1:21:34 I think that we,

1:21:36 the narrative is quite clear.

1:21:38 The the key issues are,

1:21:40 in my opinion,

1:21:41 what to do when you don't have the fiscal space and therefore you

1:21:44 cannot use the guarantee of the sovereign

1:21:46 guarantee to support part of your policies

1:21:48 and how to deal with forbearance,

1:21:50 especially in those countries

1:21:52 that where the implementation capacity is very limited.

1:21:56 Stop here.

1:21:57 Thank you,

1:21:57 Bill.

1:21:59 Great.

1:22:00 Thank you very much,

1:22:00 Alfonso.

1:22:01 OK,

1:22:02 so,

1:22:02 Alfonso posed a couple of questions to the panelists.

1:22:05 There are also a couple on the web that I'm going to synthesize

1:22:09 as

1:22:10 the following.

1:22:11 Uh,

1:22:11 the first is about burden sharing,

1:22:12 which came up under Thorsten's presentation and also Alfonso measured it,

1:22:16 uh,

1:22:16 mentioned it.

1:22:17 Which is,

1:22:18 we're talking about huge amounts of money,

1:22:20 um,

1:22:20 how should we be handling this support to firms,

1:22:23 um,

1:22:24 such that in the end we don't wind up with people saying,

1:22:27 again,

1:22:27 you bailed out the financial sector,

1:22:28 you bailed out this or GM

1:22:30 and have a backlash last,

1:22:32 like last time.

1:22:33 The second one is,

1:22:35 we're not allocating on the basis of whether

1:22:37 you're a successful firm or not anymore.

1:22:38 The tourism sector is

1:22:40 dying through no fault of its own.

1:22:43 How do we go about allocating credit,

1:22:45 uh,

1:22:46 limited credit among those sectors?

1:22:48 And the third question was,

1:22:50 um,

1:22:51 will rating agencies,

1:22:53 when they're viewing countries,

1:22:54 see this as kind of a one-off,

1:22:57 idiosyncratic event,

1:22:58 or

1:22:59 do we expect sovereign ratings to be really damaged by this?

1:23:07 Anybody can jump in if they'd like

1:23:09 to answer those small questions.

1:23:14 Perhaps I,

1:23:15 I can say a few words.

1:23:16 Uh,

1:23:17 I,

1:23:17 I like all the presentations.

1:23:19 I think that's great.

1:23:19 And also

1:23:20 the fiscal space.

1:23:22 Uh,

1:23:22 I don't have a clear answer yet,

1:23:23 but,

1:23:24 uh,

1:23:25 One has to keep in mind

1:23:27 that if you don't intervene,

1:23:28 the GDP will go down and the fiscal space might be even worse.

1:23:31 So you have to go to the maximum at this stage,

1:23:34 uh,

1:23:34 in order to

1:23:35 uh

1:23:36 make the situation not worse.

1:23:38 So the fiscal space is something endogenous

1:23:40 moving around as well.

1:23:42 So there's not much choice uh at this

1:23:45 juncture.

1:23:46 But the allocation of credit

1:23:48 and the burden sharing.

1:23:50 So I think what has to when you open up,

1:23:52 I mean,

1:23:52 what you mentioned this staggered recovery and was mentioned that

1:23:55 policymakers are at the critical juncture to make the decisions.

1:23:58 And I totally agree with them.

1:24:00 But the next decision for policymakers is how to open up the economy.

1:24:04 And then the question is,

1:24:05 which sequence you open up across different sectors.

1:24:09 And there is a huge lobbying pressure coming to the politicians.

1:24:13 And this will lead,

1:24:14 if you open up certain sectors or include certain sectors in the first phase,

1:24:18 they will then also get more funding from the banks.

1:24:21 And,

1:24:21 and that actually is done at the expense of the other sectors who cannot open up.

1:24:26 So that's the one has to be careful on,

1:24:29 it's in the sense of what the bureau said,

1:24:31 the credit line.

1:24:32 So,

1:24:33 who will get the additional funding from the banks,

1:24:35 it's a sector which gets opened up early.

1:24:38 And we don't want to go that route that it

1:24:40 really favors certain sectors tremendously and that there's an endogenous favor

1:24:44 through the banking sector coming on top of it.

1:24:46 So we have to watch out that the banking sector is not,

1:24:49 you know,

1:24:50 reallocating,

1:24:50 distorting things

1:24:52 across sectors and also across large and small firms.

1:24:55 So it's very clear in the stock market

1:24:57 that All firms suffer way more than large firms.

1:25:01 And that also hits the emerging economies,

1:25:04 uh,

1:25:04 much more severely

1:25:06 as well.

1:25:06 I very much like the,

1:25:08 the

1:25:09 informal risk sharing through mobile phone banking.

1:25:11 I hope that this will

1:25:13 help the emerging economies,

1:25:15 in particular,

1:25:16 that was a very nice insight.

1:25:19 And a positive message which

1:25:21 I always like at the end.

1:25:24 Thanks a lot.

1:25:29 Anybody else wanna,

1:25:30 anybody else want to jump in?

1:25:32 Yeah,

1:25:32 maybe I can just,

1:25:33 uh,

1:25:34 say a few things,

1:25:34 but can you hear me?

1:25:35 Uh,

1:25:37 yes,

1:25:37 you are,

1:25:38 yeah,

1:25:38 just a couple of things.

1:25:39 I've,

1:25:40 of course,

1:25:40 being from India,

1:25:41 I've been

1:25:43 watching closely

1:25:44 the policy response,

1:25:45 etc.

1:25:46 but I think it

1:25:47 extends more broadly to other sovereigns.

1:25:50 Uh,

1:25:51 I think

1:25:52 the challenge is the following,

1:25:53 which is that

1:25:55 I think the rating agency,

1:25:56 there is a permanent shock to endowment.

1:25:58 So I don't see how rating agencies can ignore that without basically saying,

1:26:03 listen,

1:26:03 we are going to

1:26:05 completely alter our mapping from

1:26:07 credit ratings into probabilities of default.

1:26:10 Uh,

1:26:11 so I see it means they,

1:26:13 they've already downgraded a few countries

1:26:15 by a few notches here and there or changed their outlook,

1:26:18 and I think they've got to do their job.

1:26:20 I think we've got to let them

1:26:22 assess credit risk the way they want.

1:26:25 I think the challenge is that some countries

1:26:27 have stable financial sectors or stable external sectors.

1:26:32 Whereas others are relatively fragile,

1:26:34 they're very reliant on what money flows,

1:26:37 and banking sectors are not very well capitalized,

1:26:41 and I think then the issue that Marcos raised becomes sort of very challenging,

1:26:45 which is,

1:26:45 do you sacrifice the sovereign's creditworthiness.

1:26:49 And that is the efficient response.

1:26:51 But if that means sacrificing your financial sector or the external sector,

1:26:56 have you factored in that,

1:26:58 you know,

1:26:58 that consequence of the sacrifice that you're making?

1:27:01 And I think it's a,

1:27:01 it's a,

1:27:02 it's really a choice between two terrible outcomes in my view,

1:27:05 I think.

1:27:06 Many of them will have to,

1:27:08 I think,

1:27:09 just feel the waters,

1:27:10 I think,

1:27:11 as they go along,

1:27:11 and I think

1:27:12 my sense is the reason why you see a lot of inertia

1:27:15 in the fiscally stretched countries and

1:27:17 emerging markets in announcing large policies

1:27:21 compared to the safe havens

1:27:23 is because for them,

1:27:25 some of their bond market and external sector

1:27:27 conditions are heavily endogenous to their policy decisions.

1:27:31 Whereas I think for safe havens they can take

1:27:33 them as essentially borrowing at very low cost.

1:27:36 And so

1:27:36 I think the approach I see therefore,

1:27:38 given the tremendous fog of uncertainty that

1:27:41 these countries are moving very,

1:27:43 very slowly in their packages,

1:27:45 even though

1:27:46 the humanitarian crisis on the ground might seem to want to demand otherwise.

1:27:51 I don't have a sort of a great solution unfortunately to propose it's just that.

1:27:56 Overall,

1:27:57 I feel that if for the very stretched countries,

1:28:00 if the multilateral agencies were able to create some debt relief,

1:28:05 but ensure that the

1:28:07 proceeds from the debt relief are targeted

1:28:10 towards the

1:28:11 most essential expenditures,

1:28:14 I think that might be the best outcome

1:28:16 for these countries in the short run.

1:28:18 Uh,

1:28:19 you know,

1:28:19 there's a

1:28:20 Patrick Bolton etal proposal of

1:28:22 creating sort of like a,

1:28:24 like an account.

1:28:26 Of relief that has been given to a country,

1:28:29 getting all the private creditors to participate in it as well,

1:28:33 and then ensuring that,

1:28:35 you know,

1:28:35 you kind of use this checking balance,

1:28:37 so to speak,

1:28:38 when expenditures are undertaken for the essential provision of

1:28:42 services in these countries,

1:28:43 and I think

1:28:44 it seemed like something that we may have to

1:28:47 entertain for some of the poorest countries because otherwise

1:28:50 they will,

1:28:50 they are caught between

1:28:52 a rock and a hard place,

1:28:54 and I think.

1:28:55 They will end up being an inertia unfortunately.

1:28:59 Yeah I just stopped there.

1:29:01 Other thoughts?

1:29:03 If I

1:29:04 can come in very briefly,

1:29:07 please go ahead.

1:29:07 Um,

1:29:08 oh,

1:29:08 thanks.

1:29:08 Um,

1:29:09 so maybe first to,

1:29:11 um,

1:29:11 answer to a couple of questions,

1:29:13 um,

1:29:13 from Alfonso.

1:29:14 Um,

1:29:15 on the reaching out to the informal sector,

1:29:18 maybe let me frame this question a little bit

1:29:20 more broadly.

1:29:21 Um,

1:29:22 so I think,

1:29:23 uh,

1:29:23 it really depends on the economic,

1:29:25 uh,

1:29:25 but also institutional structure,

1:29:27 uh,

1:29:27 of countries,

1:29:28 how to best,

1:29:29 uh,

1:29:29 push out this aid.

1:29:30 And,

1:29:31 uh,

1:29:31 again,

1:29:31 if I look at the UK,

1:29:33 um,

1:29:34 the credit.

1:29:35 Guarantees or the support going to the banking system didn't quite work and

1:29:39 I mean of course those who live in the UK know

1:29:41 that the banking system is not exactly the most efficient one,

1:29:45 but of course it's also the issue of the coverage ratio and the guarantees.

1:29:48 On the other hand,

1:29:50 had seemed to have worked quite well in the UK is these grants or these

1:29:54 payroll payments that went out to firms because it was linked to the HMRC,

1:29:59 so the British IRS,

1:30:01 the tax authority,

1:30:02 I guess.

1:30:03 Countries,

1:30:03 I mean,

1:30:04 the,

1:30:04 the US seems to go also heavily for the uh kind of sending out checks,

1:30:07 and I guess that brings me to the informal economy.

1:30:10 I mean,

1:30:10 informal meaning not registered,

1:30:11 not,

1:30:12 um,

1:30:12 um,

1:30:13 under the radar screen basically.

1:30:15 I guess the only,

1:30:15 uh,

1:30:16 way to then,

1:30:16 uh,

1:30:17 um,

1:30:17 uh,

1:30:17 coming back also to your question on firms versus households,

1:30:20 in this case,

1:30:21 it is really about targeting households.

1:30:22 It's not about targeting firms because you can't target the informal firms.

1:30:26 You have to target the households in this context.

1:30:27 I think,

1:30:28 uh,

1:30:28 again,

1:30:29 uh,

1:30:29 I guess India has a good,

1:30:30 uh,

1:30:30 um,

1:30:31 Um,

1:30:32 uh,

1:30:32 could have a head start theoretically at least given their,

1:30:35 um,

1:30:35 and,

1:30:35 um,

1:30:36 I can remind me what the system is called the,

1:30:38 uh,

1:30:38 the,

1:30:39 you know,

1:30:39 the new ID system,

1:30:40 um,

1:30:41 uh,

1:30:43 um,

1:30:43 uh,

1:30:44 in other countries that are,

1:30:45 and again some African countries the mobile,

1:30:46 uh,

1:30:47 money network might actually,

1:30:48 uh,

1:30:49 work as well,

1:30:50 and of course the mobile phone system I think

1:30:51 has been actually used in some countries already to,

1:30:54 uh,

1:30:54 to push out,

1:30:55 uh,

1:30:55 support payments,

1:30:57 um.

1:30:58 On the forbearance,

1:30:59 yes,

1:30:59 so I'm very,

1:30:59 I'm,

1:31:01 I'm a bit,

1:31:01 uh,

1:31:02 double-minded here.

1:31:02 So on the one hand,

1:31:03 so what the,

1:31:04 I think the,

1:31:04 the European authority,

1:31:06 and again it's an ongoing discussion with new decisions

1:31:08 coming out almost every week or every day,

1:31:10 it's kind of to say,

1:31:10 well,

1:31:11 you know what,

1:31:11 um,

1:31:12 uh,

1:31:12 telling the banks,

1:31:13 you know what,

1:31:13 um,

1:31:14 just let's pretend,

1:31:15 uh,

1:31:16 the economy is in the freezer

1:31:18 and uh don't downgrade firms because of the current situation,

1:31:21 don't uh uh borrowers or of firms.

1:31:23 Um,

1:31:24 let's pretend,

1:31:25 uh,

1:31:25 in 3 months,

1:31:25 6 months or whatever,

1:31:26 it's,

1:31:27 uh,

1:31:27 gonna all be good.

1:31:28 And that's also kind of relates to this,

1:31:29 uh,

1:31:30 discussion on,

1:31:30 uh,

1:31:31 on the IFRS,

1:31:32 uh,

1:31:33 9,

1:31:34 provisioning rule,

1:31:35 which would be more,

1:31:36 much more forward looking rather than backward looking.

1:31:38 Um,

1:31:39 now,

1:31:39 of course,

1:31:39 there is again a limit to that,

1:31:40 right?

1:31:41 I mean,

1:31:41 uh,

1:31:42 how far do you want to go to let the forbearance go?

1:31:44 And is it maybe better to do capital relief.

1:31:46 But in a transparent way,

1:31:48 but then still force the bank to recognize the losses.

1:31:50 So I'm a bit,

1:31:51 uh,

1:31:51 split mind here.

1:31:52 I'm normally more in favor of,

1:31:53 uh,

1:31:54 transparency,

1:31:54 but of course,

1:31:55 I also see the,

1:31:56 uh,

1:31:56 the,

1:31:57 um,

1:31:57 the,

1:31:58 the shortcomings there.

1:31:59 And which actually brings me to the other point,

1:32:00 the,

1:32:00 on the rating agencies.

1:32:02 Um,

1:32:03 and again,

1:32:03 so this is a little bit like what is the,

1:32:05 the,

1:32:05 the AA is the new BB or it's the other way around.

1:32:07 The,

1:32:07 the,

1:32:08 the,

1:32:08 the double B is the new AA or so.

1:32:10 Um,

1:32:11 Uh,

1:32:11 I mean,

1:32:11 one way the ECB has kind of shown one way to do this is basically to say,

1:32:14 well,

1:32:14 we,

1:32:15 we're just going to ignore that.

1:32:16 We,

1:32:16 we're going to ease the collateral requirements

1:32:18 and even in the worst case scenario,

1:32:20 if Italy becomes junk,

1:32:22 uh,

1:32:22 Italian sovereign bonds become junk,

1:32:24 well,

1:32:24 so be it.

1:32:25 We're just gonna keep them,

1:32:26 uh,

1:32:26 do it anyway.

1:32:27 Uh,

1:32:28 so I think that's,

1:32:28 uh,

1:32:28 that's I guess one way to go,

1:32:30 but again,

1:32:30 you have to remember,

1:32:31 of course,

1:32:31 all of these are relative,

1:32:33 uh,

1:32:33 ratings.

1:32:34 Um.

1:32:35 Sorry,

1:32:36 then,

1:32:36 um,

1:32:37 I guess the,

1:32:37 uh,

1:32:37 on the burden sharing.

1:32:39 Um,

1:32:39 there came a question up.

1:32:41 So this,

1:32:41 there is now,

1:32:42 there are a couple of very interesting papers,

1:32:43 um,

1:32:44 on comparing the current situation

1:32:46 and the funding of these losses with situations after the war,

1:32:49 after World War II,

1:32:50 for example,

1:32:51 but actually the,

1:32:52 the,

1:32:52 I mean,

1:32:53 countries like the UK and that the,

1:32:55 the,

1:32:55 the,

1:32:55 the peace period with um

1:32:57 debt to GDP ratios of I think like 200% or so,

1:33:00 um,

1:33:01 or almost 200%,

1:33:02 and that basically was brought down by high marginal,

1:33:05 uh,

1:33:05 taxation.

1:33:06 A tax rate,

1:33:07 but also by financial repression.

1:33:09 Now I'm not sure whether I want financial repression because that's exactly

1:33:12 what would happen if there's no fiscal burden sharing in the Eurozone.

1:33:15 Um,

1:33:16 so,

1:33:16 but the higher taxation is certainly one way to go,

1:33:19 uh,

1:33:19 and there are discussions on the wealth tax.

1:33:21 I'm not sure how realistic these are actually are,

1:33:23 um,

1:33:24 in,

1:33:24 uh,

1:33:24 in Europe,

1:33:25 um,

1:33:26 but of course all of this might be,

1:33:27 have to be distributed over several generations.

1:33:30 Um,

1:33:32 Uh,

1:33:33 yes,

1:33:33 so,

1:33:33 on the,

1:33:34 um,

1:33:34 the

1:33:35 targeting across different sectors,

1:33:37 I guess only one small way,

1:33:39 and again I know this is very Europe specific,

1:33:41 but again,

1:33:41 as I mentioned,

1:33:42 several countries have now put rules into place that

1:33:45 firms can only receive state aid

1:33:48 if they

1:33:49 do not do any payouts,

1:33:50 if they do not do any dividend payments.

1:33:53 Um,

1:33:53 of course that refers to,

1:33:54 to large companies.

1:33:56 Much less to the small companies where we have a very different,

1:33:58 uh,

1:33:59 situation.

1:33:59 And finally,

1:33:59 on this fiscal space,

1:34:00 I completely agree with Marcos,

1:34:02 uh,

1:34:02 it's an endogenous concept,

1:34:03 and,

1:34:04 uh,

1:34:04 the debt to GDP ratio is a ratio,

1:34:06 which has two parts to it,

1:34:07 um,

1:34:08 which the,

1:34:08 uh,

1:34:09 UK,

1:34:09 uh,

1:34:10 after 10 years of austerity found out,

1:34:12 uh,

1:34:12 uh,

1:34:12 the GDP actually,

1:34:13 uh,

1:34:14 the,

1:34:14 the debt to GDP can go up even if you reduce the deficit like crazy.

1:34:18 Um,

1:34:18 thanks.

1:34:21 Great.

1:34:22 OK,

1:34:22 we have unfortunately run to the end of our time.

1:34:25 Um,

1:34:26 I want to thank,

1:34:27 um,

1:34:28 all of our distinguished panelists,

1:34:29 Sergio,

1:34:29 Sergio,

1:34:30 uh,

1:34:31 Um,

1:34:32 Thorsten,

1:34:34 Viral,

1:34:34 and Marcus,

1:34:35 um,

1:34:35 for end of,

1:34:37 uh,

1:34:39 Alfonso,

1:34:40 for excellent presentations and discussion.

1:34:42 Um,

1:34:43 we hope to have you back again and to talk about,

1:34:46 uh,

1:34:46 some of the finer points of this as we go along.

1:34:48 Thank you very much to everybody.

1:34:51 Thank you very much

showAllTimestamps

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transcript

Um, yes, it's 110. OK, Lester. Um, OK, so welcome to all of you, uh, welcome to all of you to this, um, panel on financial sector policies to salvage firms hit by COVID-19. Um, this is an incredibly central topic for us because, um, Figure out how to what the first panelists will hibernate our firms so that when we come out at the other end we don't have, we minimize the scarring that they've suffered and the economy overall rebounds quickly is absolutely central to to. What we should be focusing on and the financial sector is one of the key tools that we have or key levers that uh we need to be working with. So we have an excellent panel today. Um, we're going to start with, um, Sergio Schmuckler on financing firms in hibernation during the COVID-19 pandemic. Um, this is joint work with Tatiana Didier in, um, in EFI also Federico Jones, Mauricio Larrain, and, and yes, and Mauricio Larrain. OK, so each speaker will have 15 minutes and then Alfonso Garciamora will come in with comments at the end for 10 and then we'll open it for discussion. Um, Sergio, please go ahead. Well, thank you very much, Bill. Thank you, everybody for correcting. Thank you, the speakers for participating. And thank you, the FCI team and the DEC team, in particular, Ryan and Ale for coordinating and making everything run smoothly. So the work that I will present today is a brief that we have written, as Bill was uh saying with uh Tatiana Federico Mauricio, uh, they are from Chile. And this is a, a brief that we put together with the World Bank um Research Center in Chile and the Malaysia hub because uh this topic is also of special interest to the Latin America and the Asian region. So let me summarize uh the brief, uh, briefly. Here So as everybody is probably connecting knows, um, the COVID-19 pandemic has had a profound effect on firms. That there is a lot of heterogeneity across industries and also across firms within industry. At the two extremes, there are some firms that are completely shut down. Others are doing fine or are in the middle, but the large mass of the firms are hurting. And the policy debate now has moved to the need to salvage firms, in addition, of course, to provide assistance to households. There are already many proposals to do so. And what we do in this brief is basically try to provide a unifying framework to organize a little bit the policy debate related to farm financing during the pandemic. We discussed the different policy choices, uh, given the challenges that policymakers face, and we also discussed the trade-off that policymakers are facing when trying to uh to save firms. I will try to go very fast on the policy brief. There's more discussion there, but I will provide a summary here. And in the brief, we make 4 related points that this is a different type of crisis than before. The COVID-19 health crisis has had economic and financial effects. This matters for both the transmission channel and the resolution of the crisis. It has put a lot of stress on firm relationships with the different stakeholders. And we argue that one way forward is for firms to hibernate during this period of uh slow economic activity, but one important point is that firms need credit to go through this period. And there is a lot of policy action on the financial side to try to provide this financial assistance. We argued that the existing uh in uh financial infrastructure is ill-equipped, uh, for the pandemic. And if anything, uh, uh, working within the existing uh infrastructure, it could make the crisis worse. So policymakers are forced to innovate right now to try to come up with different alternatives that are not there. So the typical financial crisis that we have seen, or even an economic crisis, usually they tend to originate in the financial system, in banks or market participants that behave irresponsibly, usually that um due to ex ante moral hazard. Uh, that produces a liquidity problems in, in the market or in banks that suffer runs, and that gets transmitted to the real economy. As, as banks stopped lending. With the current coronavirus crisis, the root of the problem lies outside the financial sector. This is a health issue that has imposed social distancing, as, as many people have argued, this has uh created a supply and demand shock for firms. Cash flows have collapsed at to unprecedented levels, and firms are struggling to survive. This also affects the financial sector that is lending to firms. Or just to give you an example, the days of cash in hand that firms have a different across industries, there is a lot of heterogeneity across uh firms, as I mentioned, but many firms, and many industries have 30 days of cash to continue operating. Many other industries have, uh, firms have around 60 days of cash. So firms don't have a lot of cash to withstand a sustained, um, prolonged, um, lockdown period. So this is, as we mentioned, the transitory health shock, um, that once the immunity is attained, the crisis will be resolved. But as long as the shock does not persist for too long, then most firms could remain solvent. In the meantime, there is a credit risk problem because we know that most industries as a whole will exist later on. There will be a restaurant industry, an airline industry, uh, maybe a cruise industry, but not all firms are likely to survive the lockdown. So then banks face problems with the assets, not necessarily with liabilities in typical financial crisis. And they do, they do not know how to lend. So that might prompt banks to uh push firms into bankruptcy. This transitory shock uh could make uh these bankruptcies uh inefficient. Because firms depend on key relationships with stakeholders. It takes time for firms to get to know and hire workers, uh, have good relationship with suppliers that provide specific parts, uh, build relationship with customers, credits, and even the government. These relationships are very costly to build, maintain, and adjust. They are part of the intangible assets of firms, part of the organizational capital. If these relationships are destroyed during the crisis, they will need to be recreated later on because, as we mentioned, we will need airlines or restaurants later on, uh, healthcare providers, etc. So if we destroy, if these firms get destroyed, er this might lead to even a longer effects, er, longer hysteresis effects. So what we argue is that one way forward is for firms to hibernate, firms that would be operating at a minimum capacity if needed, it will, they will burn some cash to withstand the pandemic, and this idea of hibernation is different from the idea of freezing. There has been a lot of discussion in the press and in some countries about freezing the economy. Here, the, the idea is not to freeze firms. The idea is that the relationships that firms have are frozen. But not destroyed. Uh, the different relationships, um, will probably have to absorb part of the shock. Otherwise, we will, um, create zombie firms, uh, Janet Yellen and other people are arguing with, uh, a huge debt overhang, uh, later on. But even though firms can go to a minimal operation, um, mode, they, they will still need cash to survive because they don't have that much cash to go through this, uh, period. And that cash can be provided by the financial sector. So I was arguing the financial sector is not uh well designed to resolve this type of crisis because usually um since crisis start in the financial sector, the idea of the financial infrastructure is to identify the bad apples uh that they are behaving uh wrongly that due to moral hazard. And then avoid contamination to the rest of the financial system. If there are bad firms or bad banks, you separate them and you keep the rest of the system moving, and that's how the financial infrastructure, the budget 3 regulation, deposit insurance, and then of last resort is designed to, to, to work towards. So the timing in the typical financial crisis is to act fast to resolve the crisis. And once the, the problem in the financial sector is addressed, then the rest of the economy recovers. Here with the COVID-19 type of shock, the evolution doesn't depend on, on solutions on the financial side, on the, in the, on the economic side, depends on the, on the health uh resolution and punishing firms in trouble is not a good option. Usually during typical banking crisis, financial sector problems, you try to identify who's in trouble and remove them. Here, everybody's in trouble. And that's not good news. And it's not that they, they are in trouble because they were behaving badly, so punishing these firms would be counterproductive. So, so, we have to go against the current infrastructure of the financial system, and that's why policymakers need to innovate. So there are different policies uh that have been put forward. The idea is to generate credit to go to firms for refinancing existing debt and for extending new financing with the idea of avoiding bankruptcy and liquidation. There is a big issue how to absorb and and redistribute the increased uh credit risk that is in the system. Who's going to take that risk? In terms of the policies, there are uh policies that go towards adapting the institutional framework, the existing institutional framework that is not prepared to deal with the pandemic. And there are policies related to providing credit to firms. Those policies are, are, can be divided into two. Some are policies related to providing liquidity to the intermediaries or banks, and there are also policies that take direct credit exposure by the government on firms. So regarding the adapting the institutional framework, the typical policies are, uh, policies related to forbearance. Uh, usually, regulators don't like forbearance, but in this case, uh, forbearance might be needed. The government might need to work with different, uh, branches because it's not just the regulators that can provide forbearance. It might need to uh work with other, um, parts of the government. And there is also a trade-off as in with all the policies. Uh, the trade-off is that by providing forbearance you can provide rapid assistance like for, for example, postponements of, of payments. But you can create problems of more hazard. You have already an a problem that you might bail out firms that were behaving badly um before, and you might give incentive for firms to behave badly later on. And there is a question of uh redistribution or who, who is taking the risks, so that is not uh easy to solve. The, the, the, the policies related to providing liquidity to intermediaries are there, they are rapid to implement, uh, they involve reducing policy rates, extension of bank liquidity to banks, etc. But it's not clear that they are going to be super effective because even if we give liquidity to banks, the banks don't know who to lend, given the increased credit risk and the uncertainty about which firms are going to survive the crisis. And also, we might put, um, create instability in the banking system if they take uh too much risk. Um, Vidal will, will probably mention some of these issues uh in his presentation later on. And then there is the other policy which is a great risk to government, which is the, the red line here. Uh, many countries have, in addition to other uh revenue and expenditure measures, they have taken big chunk of risk towards uh lending to corporations, providing loans, equity injections, and guarantees. These, uh, there are different instruments for the government to take risk on firms, uh, through capitalization of state-owned banks, uh, scaling up of, uh, private credit guarantees, etc. It depends on whether the loans go to SMEs or to large firms. And there is a trade-off here. The benefit is that you give rapid access to credit, and the drawback is that you are blowing up the balance sheet of the government, so the government is taking a lot of risk. It might be owning the private sector at the end of the crisis. So each different policies have different uh trade-offs and, and the, the policymakers will need to prioritize which policies might um be best for the different countries, uh, for example, how much to save large firms as as as SMEs, how much to save firms with different relationships with stakeholders, uh, firms that have a lot of workers versus suppliers, uh, essential industries, uh, whether are, are those are will receive priority. And whether they let the financial assistance is conditional on keeping certain relationships. There is a lot of debate of whether firms are using. The money that they are receiving from the government to keep workers or fire workers. There is also an allocation of resources over time that the government needs to decide how much to provide during the hibernation period vis a vis how much to provide when the crisis gets resolved and the economy needs to reignite. A lot of countries with differences, um, so in these conditions matter. They stark differences between developed and developing countries, just speaking to, um, Thorsten's uh, presentation, he will mention some of these issues, uh, later on, and there are also a lot of differences within each group. And there is finally an intergenerational issue. The, the lockdown can be viewed by some as trying to save uh uh older people and punish young people that cannot go to work. Here, that intergenerational transfer is not there because we are, young people will pay for the debts that the governments are accumulating, but our young people are the ones that are going to benefit. Also, relatively young people are going to benefit from our farms being saved. So in that sense, that intergenerational transfer uh is different than from the lockdown intergenerational transfer. Let me stop here, um, given the time, but we can um continue the discussion later on. Thank you very much. Thank you, Sergio. Um, excellent introduction for the panel. Um, our next speaker will be Marcus Brunnemeyer. He's Edwards S. Sanford Professor of Economics and Director of the Bentheim Center for Finance at Princeton University. I should also mention that he runs a podcast on COVID, um, out of Princeton, which has featured, uh, many prominent economists thinking about key elements of this and it's highly recommended. Um, I will just leave it at that. Marcus, please go ahead, 15 minutes. Thanks a lot, uh, Bill. It's a pleasure to be here. Uh, can you see my slides? Yes, OK, fantastic. OK, that's, uh, I would like to pro put a proposal forward which I wrote down with Alvin Krishnamurti from Stanford. And oops. Before I start, let me just um compare the current crisis with the 2008 global financial crisis, just to get a different perspective of how the different challenges, how the challenges are different. So what I would say, if you look at the pre-crisis phenomenon of 2008, there was a huge buildup of imbalances, there was a run up of credit, banks, this particular shadow banks were thinly capitalized. While in 2020, you know, unemployment was very low. And actually, the economy was doing pretty well. Uh, we had a lot of corporate debt and the US government was going into debt a lot because of corporate tax cuts and other elements. But in general, it was a well-balanced, uh, economy. So that's a very different from a standard recession, which is more driven by imbalances building up on the financial side. So what triggered the crisis, the crisis in 2008 was more revaluation crisis. So real estate was re-evaluated. In a sense, there was a change in this drastic discount factor, because we totally misestimated the correlation of house prices across the regions in the United States, and that caused a lot of ripple effects and knock-on effects. While in 2020, it's much more a drop in corporate cash flows. And it was, of course, induced by the lockdown. And that's a, that's a big difference. Uh, so one is more us come back, but the other one is uh more the, the cash flow aspect to it. And the question is how much can you do, uh, in, in the latter. And what, how, and then there was amplification because of balance sheet effects. And in 2008, it was primarily the The households and the bank's balance sheets. But right now, it also includes to a large extent corporate, the corporate sector as well. And the financial sectors, of course, always involved in that. Uh, we have shadow banks. A lot of special purpose vehicles, but they were mostly partly connected at least to the banking sector. Now we have a lot of fintech in mortgages, but for the SME funding from the corporate sector, small and medium enterprises, banks are still the dominant funders. Across the world so much more in Europe, but also in the US. If you talk to SME data providers, and we talked at length with SME data providers, if the banks are still predominantly funding SMEs, even in the United States and outside of the United States, it's even more so. In terms of structured finance, um, Warren Buffett called CDOs as weapons of mass destructions for the finance. I think now we have CLOs, uh, where the loans, the structured finance products as well there. And importantly, and I will come back to that. Uh, what was the objective of the policy in 2008 was to stimulate the economy, to balance it. Uh, right now, it's all about survival. So it's making sure that certain firms survive and households financially survive rather than stimulating accessing, uh, additional spending. So it has very different implications, what you should do with an interestst cut or not. Do you want to stimulate, uh, the economy or do you want to just make sure that firms can survive, um. So what's the challenge? So the challenge is like coming back to the hibernation strategyer pointed out so nicely. I thought about it. So if you could just stop the clock and go to hibernation for the whole economy. And you say all rent payments, all payments are just stopped for 3 months, and all wage payments and all the other debt is just, the maturity is just extended by 3 months, and it actually will be fairly easy. We could just implement a strategy, you know, for 3 months, no payments happens whatsoever, and all other maturing debt is just extended by another 3 months. So we just stopped the clock, essentially. And the whole system, there will be no freezing, there will be no bankruptcy, there will be nothing, and everything will be working uh very well. The big challenge comes that we, we can't stop the whole economy, but only part of the economy. So we have some essential sectors, food, food production, and so forth. The healthcare sector and other things, which have to be still be working or even working even more if you think of the healthcare system. And you have to make the payments to the healthcare system and everything is interconnected. And you want to stop part of the system, but keep The other parts still running, so shutting down part of the economy, which is interwoven to, to each other, that makes the whole thing so complicated because we can't just simply say all payments won't happen and everything is fine or everything is stopped. And we just go in hibernation for a few months. And that makes the whole thing challenging. So I thought about, so we now have many policy actions to be undertaken, and I tried to provide some taxonomy, how to classify these policy actions. And um That's what I mentioned this slide already in the, in the webinar series, um Bill mentioned before. So how can you classify the policy actions? You can be either very firm focused, or you can be very household focused. And I said mentioned already, this case is different because the corporate sector is also very much involved. The second dimension, you can say it can be very broad brushed, or very targeted. And we might not have the fiscal space to go very broad brush. Um, there is, you know, we have to probably be more targeted. I mean, there's all this debate and now it's a time to go for universal basic income, but you know, now we have even less fiscal capacity or fiscal space to do so. And there's an idea by Craig Mink who was pushing essentially that you do expose targeting. You're very broadcast, distribute funds and cash, but exposed the guys who don't really need it, you have to pay it back. And that's a debate, you know, you can think of, you know, because we cannot evaluate at the moment who really needs it most, we will figure out later on. But this also comes with huge problems that people might not spend it. I said, oh, you give me this money, but I might have to pay it back, so I might not spend it. And that's also hugely there might be no pickup of these programs at all. And we have seen from the last crisis, there were a lot of housing programs, uh which were not picked up at all. And I think that's my fear from this exposed targeting, even though it's a, it's a good idea, it might not work in practice. The third dimension is you can think of loans versus grants. And, you know, if you give some loans, again, there's this, this pickup problem if you make it uh exposed conditional, if you give grants, again, there's this um element that it might be too costly, you, you have no um physical capacity to really do that. And And of course, you would like to have some risk sharing to some extent across these two sectors in the economy, which are all interwoven in some way. The third element that's related to, you know, the, the pickup aspect, how do you channel the government support uh to the economy. So you can directly give money through uh to the house, household sector. And that's typically is not so easy. Just the helicopter money is debated about. It's not so easy. Even sending out checks in the United States is very, very complicated, and it depends very much on the government structure, the governance structure the government has in place. So if the certain schemes already in place, like in Germany of the Kurtzerbeid or short term work scheme, it's working extremely well. is dried out many, many times. So you can easily channel funds um through very easily. Uh, if you have what's central bank digital currency, which something was hotly debated before the COVID crisis, Should we have central bank digital currency where most citizens have an account with the central bank. If you have this, then you could transfer funds more easily. So this setup, this institutional setup matters to a large extent how you can channel funds through. So either directly to households or to households via firms. So the short-term work would work primarily you pass on funds to firms who then commit not to fire the workers and still continue paying wages to households. And that's uh something which to, to think about. And it might work in certain countries, might not work in other countries. So it has to be very specific. And, and of course, uh you can also pay to firms via banks, and that's to a large extent you have to do with banks. If you don't do it very broad I want to find it to really channel it to the uh parts of the SME. In enterprises who really need it, then you have to go to some entity like the banks who know who really needs it. But there's huge problems there too. We see, in particular, the banks pass on to the guys who are least risky and need it the least. And that's um a problem as well. And then finally, there's uh should The current policy action be really focused on just solving the current problems, or should it be more broadly focused on structural problems to solve it in a particular way which channels already the future uh governance structure in a particular way. And there's all this debate, uh Which is coming forward also, uh, from certain leaders uh in various governments, say, OK, now, we should also use, solve the COVID crisis in such a way that it's also helpful, for example, for climate change and other aspects. So that makes the whole policy action even more complicated. Now, but after doing this broadcast, let me go to this uh uh policy we have proposed with Arvid. And I have a picture here which just shows, you know, everything is upside down now. And The argument then essentially is that what you should have done in normal crisis, you should not do now. And what you shouldn't do in normal prices, you should do now. So everything is flipped around. So it's upside down. So usually, you focus on creating stimulus, so cut the interest rate to stimulate spending and investment. This doesn't help anyway, because nobody will go to restaurants or demands certain things. You can even make it cheaper, you can set the interest rate minus 20%. It doesn't really work. Uh, and, and here it's very much focused on survival, as I mentioned earlier. So what's, uh, what's this particular proposal about? One is to recognize, it's very different from country to country because the insolvency law is different from country to country. So that's the first thing. In the US you have the Chapter 11, which works really well for large companies, and it wipes out the shareholders. But the companies keep on running. So if you have large companies, that's not a big deal in a sense, we are had airlines which go bankrupt all the time, you don't hardly notice as a customer or society that they go bankrupt. Um, it's not good for the shareholders, but for society, it's not a dramatic thing. But if you have SMEs were, these are more entrepreneurial firms, where entrepreneur himself has equity stake. And if he doesn't have enough equity, then the whole firm doesn't work anymore. And for them, you need a different structure. And the usual aspect in the recessions is to avoid evergreening. So evergreening, meaning that banks just constantly keep on funding, um, for the new loans in order to uh uh pay off old loans. And the banks are just busy doing that type of funding instead of funding new, more productive firms, new startups, and other firms. And that typically you want to avoid just thinking of Japan situation, productivity goes down, everything is not going well if you don't fund new firms, and you keep on funding old zombie firms. Now, in the COVID recession, you really want to promote evergreening. So you want to offer banks a cheap central bank funding to roll over loans in order to stabilize the existing businesses or stabilize the linkages as Sergio pointed out, uh, among the whole social capital, uh, which is out there in the economy. So how can you promote this evergreening? So you can promote this evergreening with carrots and also with sticks. OK. So the currency is to provide the banks, the central bank provides essentially cheap funding. And uh one, how could this be if you have a rollover loan for an SME you can use this loan. It's very favorable. Terms as a collateral at the discount window, let's say at the central bank. So this loan should be exclude existing co loans, loans that come due in the next 3 months. So in particular, it is a roll of loan, a loan the bank was willing to grant before the crisis is considered as safe. A loan which is newly given to a new company, it might not be safe to be. Has problems. So you say rolling over all loans is granted. That's what the evergreening comes in because the banks said at that time, it was a good loan to grant, and then we just want to keep this firm alive and roll it over. And you get at the discount window of rate, let's say 2-3%. It's a little bit like the uh targeted LTRO, the ECB's granting. But for the US or for other countries, you go to the discount window only get this favorable discount rate, uh, at a negative, potentially negative rate. So it should be 10% less than the typical policy rate. And of course, the Fed is very reluctant to go to negative territory, but for this part particular subsection, it can go in the negative territory and has done this discrimination across various funding arrangements already in the past. So it's part of the 1333 uh legislation. Then, the next thing is to stick. So if a bank is not rolling some loan, then you want And the old loan is not paid back. You want to be very strict on declaring this old loan as non-performing. That's a stick, essentially. So you want to give really the bank an incentive to evergreen to roll over the loan. And that's more generally. But more generally, you want to slow down the bankruptcy procedures. And you want to clean up the system very fast, you want to speed up bankruptcy procedures. Now you want to do the opposite. So it seems all very paradoxically. Paradoxical. But I think that's the main message of this proposal and from a broader theoretical point. And then we have particular implementation for SMEs using this evergreening aspect. So let me stop here and uh pass it back to to Bill. Sergio. Thank you very much, Marcus. That is very provocative. Um, OK. Our next speaker is Viral Acharya, who is CV Star Professor of Economics in the Department of Finance at New York University Stern School of Business. Um, I think it's also interesting for us to know that he was deputy governor of the reserve. Bank of India from 2017 to 2019 in charge of monetary policy, financial markets, and financial stability, and he was the director of the National Stock Exchange. So he brings a very proud focus as well to his talk. So welcome Vira. Uh, thank you, Bill. Uh, thank you, Sergio, for inviting me. I just want to confirm if you're able to see my slides. Now we, now, now we see them. Yes, now you see them. OK, very good. Um, so, um, you know, I want to take off a little bit from where, uh, Marcus, uh, left, and, um, uh, I'll talk a little bit about the program that's been implemented in the United States, uh, and it shows the limitations, uh, sometimes of trying to do things through the fiscal route. Um, and, uh, and I think I want to then move into why we may want to ensure that the intermediation channels remain healthy, uh, for down the line, uh, recovery or the morning after, uh, in the meantime. Uh, so I, I think I want to end up though with a broad concept of a pandemic stress test. Uh, I haven't thought through it 100%, but, uh, I'll shed a little bit of light on the kind of things we have to think about when we see whether structurally the intermediation sector, uh, at least the banks are positioned right for the recovery or not. So, uh, as you know, in the United States, the Paycheck Protection Program has been implemented around in two tranches, close to $650 billion has been allocated to it. Uh, before the first program was announced, uh, I had put out a short note with one of my PhD students who does a lot of work in small businesses to make the program more effective. And actually our main recommendation was fairly simple that that even a country as large as the United States, the safe haven, reserve currency, etc. does face fiscal constraints. It can't get any package passed through the Congress whenever it wants. And so to the extent that the needs for the corporate sector, the private sector to keep employees on payroll. have been estimated for three months to be as high as $1.2 trillion and that's really not the allocation made to the program. It would seem rather important to target the program, get it where the likelihood of a slowdown or the shutdown is perhaps the highest. This could be done objectively. Some economists have Provided a classification of sectors or businesses into jobs that can be done more readily from home than otherwise. Unfortunately, for whatever reason, the program was chosen not to be targeted. It was essentially, you know, eligible banks would essentially make applications to the Small Business Administration. And I've actually found out through some internal contacts of people who are supporting the SBA that actually they're following something like a round robin algorithm which is that they approve one loan from every single bank first before you kind of reach, uh, you know, exhaust some banks, etc. So this has led to It turns out there was already a paper that I saw yesterday from Chicago Booth professors. They've got access to confidential data that SBA refused to give to the Wall Street Journal. I don't know why, uh, but it turns out that the top 4 banks account for 36% of the total loans, but they've disbursed less than 3% of all the loans because of this round robin algorithm that's being applied. Uh, funds don't necessarily seem to have flown into the more adversely affected areas of the pandemic, uh, which also seems a problem. So, uh, uh, the long and short of it is that, and this was my experience also at the Reserve Bank of India, that there are limits to the design of these programs when done through centralized authorities. Uh, sometimes they are not done with economics in mind. Uh, sometimes they are too worried about the optics and the distributional consequences in a, in an optical sense rather than in an economic sense. Uh, and perhaps there are political economy constraints to even using what might seem objective criteria to favor allocation in time such as this. So, uh, uh, in the end, uh, I want to therefore turn to the intermediation sector, uh, and I want to talk a little bit about how it has been doing in terms of provision of liquidity to the corporate sector. And I want to raise the issue that we may have to think about the health of the banking sector. I'm going to use the United States as an example. And I think there are many reasons for this. One is that what seems temporary right now may actually be a deeper and a more protracted recession for the simple reason that different parts of the world are going to recover in a very staggered manner. And so global activity, even in the recovery phase, may have a natural inbuilt hysteresis given that the start of the pandemic, it spread. And perhaps containment are really happening with different sort of synchronicity across countries. Uh, There's also something I'm going to show you which suggests that banks are likely to be. Bank capital is likely to get locked up with those borrowers who can prearrange liquidity facilities or lines of credit, and this is going to mean that the likes of small businesses that very often are not in the market for liquidity insurance, they rely on spot loans from banks, may actually get crowded out as and when even the recovery takes hold, perhaps even earlier than that. I like to think of it as a contamination effect, which is that banks would like to provide liquidity insurance to the relatively healthy firms, but now when they draw down the lines of credit, their capital is not available actually to provide liquidity to those who are actually not in the insurance markets. And third and last point before I move on to showing you some facts is that. We have always regretted delay in stabilization of the banking sector in terms of capital requirements. If you recall, probably in Q3 and Q4 of 2007, we thought probably, you know, the crisis was not going to blow up in any significant way, and unfortunately it did. And I'm quite concerned that that we may not be able to simply arrest this in a temporary manner. There may be some aftereffects of what is going on. OK, so as you know, uh, firms do arrange liquidity insurance in the form of credit lines. Uh, generally these are used as last resort, forms of liquidity insurance, uh, and they are drawn down when markets otherwise freeze for banks. They could freeze because of. Uh, wholesale finance such as commercial paper folding up, bank loans getting expensive, bond markets not having much liquidity. So just to motivate this, right around the early March, once the contagion of the disease seemed to be spreading severely to the United States, essentially wholesale finance froze up and borrowers started drawing down in an unprecedented manner on their credit lines from banks. Uh, this quote seems to suggest that the total credit commitments to corporations are on the order of $2.5 trillion and actually 2/3 of these are provided by just the four large banks in the United States. Now note that these were also the four large banks who also hold the lion's share, 36% of the small business loans in the United States. So the question is, can banks withstand such a tsunami of drawdowns? It depends. I'm going to first show you a stress test that is based on two past recessions. So this is the 12 and the 07 08. So what have we done here? What we have done here is the leftmost columns show you the outstanding credit, credit lines by rating category as of now. Uh, so these are actually on the order of um $1 trillion and then you can see by different categories of loans. This is just for banks. Some of the syndicated facilities also have participation from other players in this market. Usually the lead banks hold the lion's share of these facilities. Then the second column, which is the percentage, shows you the drawdowns, sorry, these are the drawdowns in the overall. The 3rd column shows you what drawdowns over a period of 12 months happened in these lines of credit during the past two recessions. The second scenario only uses the global financial crisis for the stress, but actually the global financial crisis was not too different from the corporate recession of 102. And if you then extrapolate from these drawdowns into the actual numbers, what you see is that it would imply about 25 to 30% of drawdown that banks should witness around $250 billion of drawdowns on these lines of credit. Now the question is, is this large, so you can look at the 100 largest banks, and we did this. And just in pure terms, uh, the level of drawdown implied by the past two recessions would cause only about slightly around 1% of their capital. So what happens is these contingent liabilities will now come on the balance sheet. There'll be a capital allocation from that that's much higher than when they were just lines of credit, and that's basically going to lock up in some sense the capital that you thought was available on these new loans which are being made. If there was an extremely adverse scenario, so in fact you had a close to a full drawdown, then the tier 1 ratio would come down by another percentage point. But of course this is going to be coincident with several other scenarios such as very high default rates on existing loans, perhaps severe drawdowns on credit card facilities, and so on. And we think that the banks in this scenario would be brought quite close to the regulatory. So anyway, these are just sort of one-off calculations. The question is what has happened. And it turns out that just in one month of March, actually the stress seems more intense than what it was for a whole year in the past recessions. So what we did is, uh, first I want to show you that banks have indeed been hit rather hard. So the left graph here shows you the performance of banks. Relative to firms, of course there's a little bit of cross insurance happening here is that precisely because the lines are getting drawn down, firms are actually being cushioned and the banks are actually suffering in the stock market. So you can see that banks have lost almost 20 to 25% more. Than the firms, and it turns out banks have also lost far more on an index basis from January relative to all other firms in the financial sector, broker dealers, insurance, security investments. And the question is why so, and I want to explain that these contingent credit line drawdowns have been a very big part of this higher loss. The cumulative drawdowns by the beginning of April, were already actually the stress test estimate we had for the whole year, so about $250 billion have been drawn down already. It is flattening in this month partly because of the stimulus measures. Uh, and you can see that, uh, the drawdown rates on the right side for the firms that are drawing down are actually almost close to now 70 to 80%, saying that they are also actually reaching the limits of their insurances. So what we did in order to ascertain what's causing this bank price corrections, we constructed a simple measure of liquidity risk for each bank. We looked at unused commitments of bank plus its wholesale finance reliance minus its liquid assets divided by total assets. Uh, and then we separated banks into those that have above median versus below median drawdown slash market freeze risk, and you can see that the market has been punishing more heavily the firms that have the high liquidity risk. You can do this through regressions where you control for all kinds of various other characteristics as well. It's a good 10 to 12% of an additional liquidity discount. In fact, my sense is the reason why JPMorgan, which looked very strong in January, has suffered quite heavily actually in stock price correction is because it is one of the most exposed to contingent drawdowns on its facilities. Um Uh, in terms of, like, if you just looked at a simple cross section, you can see that there's a fairly steep negative line of bank stock return against this liquidity risk. And then as I said, you can put this into explaining the cross section of the bank returns and and in general, there's a phenomenon I want to come back to, which is that these risk exposures are behaving like stress scenarios. Both the market exposure, the beta, and the liquidity risk term that we have, as you can see on the red line in January and February, the cross-sectional estimates were very close to 0. Uh, but in March, uh, it's as though the risks are igniting and the market is now actually pricing these risks in the cross section very, very severely, um. Um, uh, uh, a very important part of these drawdowns that is being severely punished in the markets. is actually the exposure to fossil fuels, as you know, just on one day, on 9th of March, there was a very massive correction to oil prices. Oil volatility went up from 40% to 100% and actually hasn't subsided. If anything, it went up even further during the settlement issue when the WTI crude went negative. one minute, OK, yeah, and you see that the oil price correction is also on the right hand side. If you just took the exposure to oil, that's getting a very severe, cross-sectional impact in the market. Once again, it again has this property of getting ignited. Not much behavior in January and March of the cross-sectional pricing of the risk. But especially the oil sector and the liquidity risk, and in fact these seem to be priced much more than other sectors which are actually much more directly affected because bank exposures to these sectors are very, very large, OK. So what should be done? My sense is that while it's important to respond to the immediate crisis in terms of relief measures, I think the Federal Reserve and the central banks should waste no time. First of all, they should preserve bank capital. Uh, they should, uh, as a blanket suspend any payouts and capital erosion simultaneously. They should ask banks to raise capital. I think it's not good enough what Neel Kashkari, uh, one of the governors, has done in FT, which is saying that large banks. Banks should raise $200 billion of capital. It's just not sufficient. There are signaling problems that are debt overhang problems. I think they need to ask banks to raise capital by regulatory fiat. They have the powers to do so for systemically important financial institutions. And I think they can very easily fine tune the requirements based on the drawdown risks. All that you need to factor in is that there's going to be a drawdown rate in the stress scenarios on these lines of credit. They're going to hog up capital and therefore you can create additional surcharges. Why does this need to be done? Because you want to ensure that firms that don't have liquidity insurance, the small businesses, can have access to bank capital and are not contaminated when the insured actually draw down. And of course bank capital requirements can be relaxed. Uh, I'll skip all this. Just a last point on this, I think structurally we may have to think about climate change stress tests more seriously. There is a view in the medical profession that the reason why these styles of epidemics or pandemics are becoming more frequent. it's because animals are actually moving from tropics towards the poles. They are not exposed to the same viruses and bacteria that they were earlier, and through that, the zoonotic diseases are more likely to hit humanity than they were earlier. So I think now we have the pandemic has given us a real illustration of how climate change can actually play out as a stress test, and I think we perhaps need to take this more seriously, at least in the financial sector stress tests that we. Thank you. Sorry for running over. No, thank you very much, Vira. Um, our next panelist is Thorsten Beck. He's professor of banking and finance at Casper Business School in London. Uh, he's a research fellow of CEPR. Um, most importantly, he previously worked in the research department of the World Bank. So welcome home. 15 minutes, please. Well, thank you very much, uh. Uh, Bill, uh, let me see whether I can upload my presentation. I think it's this one here, yes. OK. I hope you can see this now. Um, yes, thank you very much for inviting me. Um, what I'm gonna do is, um, I'm gonna give a rather broad overview of different topics, and as you will see, I'm, uh, gonna touch, uh, among, uh, I'm gonna touch on many of the issues already raised by the, uh, previous, uh, uh, three speakers. Um, let me also say that, um, um, I will focus mostly but not exclusively. on Europe, uh, maybe give also an additional perspective, um, to what, um, um, uh, the, uh, Marcos have already mentioned, uh, with respect to the US, and then at the very end, I'm gonna make some, uh, remarks, but these are really more like thoughts, I would say at this stage about the situation in developing the emerging markets coming also back to the theme that, uh, uh, Sergio already mentioned. Um, Right, good. So, um, Marcus already referred to this, the, the difference between the great financial crisis, the great lockdown. Um, yes, this crisis did not start in the financial sector, but of course, the financial sector will be affected negatively as, uh, many, if not most other sectors. However, of course, we also know that the bank financial sector, especially the banking sector, can be critical in in determining whether, um, there will be a relatively speedy recovery, at least, uh, not maybe V shape anymore, but at least U shape, or whether it actually will turn into something even worse, um, which I will come back into a moment. Um, now again, coming mostly from the, um, European perspective, um, I would argue that the reaction of prudential monetary policy makers has been quite, um, uh, speedy, quite quick, uh, quite effective, I would say. Um, and we have maybe also gained a little bit from what has happened over the last 10 years and, uh, as a consequence of the, the global financial crisis. So the regulatory reforms, um, the Basel 3. Uh, reforms have certainly strengthened the capital buffers, um, that's very clear. Um, we also have much more data available now to actually monitor the, uh, situation. Uh, I'm not sure whether that might have been so easy actually for, for example, if you had to do an analysis as he just did, uh, um, uh, 12 years ago. Um, I would also argue that the experience of crisis management. Um, has also enabled, uh, the quick reaction that we saw this time around, especially in the prudential area, um, where, uh, I think, uh, 12 years ago, the reaction was much, uh, more, much slower, and of course also much more uncoordinated. Um, finally, um, I I think the framework for international cooperation is, uh, is good, maybe even better than it used to be. In Europe, it's definitely much better. Although with the caveat I'm gonna come back to in a moment, um, the question, of course, is being, is it also being used, and they actually are much more skeptical, and I'm gonna come back to this when I talk about, uh, payout restrictions in just a moment. Um, Now I think, uh, as I just mentioned, uh, I think the uh the, the crisis did not start in the financial sector very obviously, but there is a kind of um, I'm not sure whether I call it tail risk or there is definitely a risk, a non-zero risk that this economic crisis might actually turn into a deeper crisis, uh, especially, uh, here in Europe, be it the banking crisis or in the worst case scenario sovereign debt crisis, or I may add, uh, actually also another political crisis which might be related to these two issues, um, which I think we should not forget. Um, now, Banks, um, and I think, uh, Sergio already alluded to this, and of course, the, uh, um, suggestion by, uh, Marcus, uh, kind of also goes this line, goes this way, um, can be very helpful, um, during the great lockdown, and they can also help during the recovery phase. Um, so as Viral already, um, uh, showed, there has been a heavy drawdown of credit lines. There has been also generally an increase in credit demand, or ECB, uh, uh, got out some data yesterday that showed exactly the, uh, quite, uh, dramatic increase in the credit demand over the last, uh, quarter. Um, now I would also argue that, um, uh, the kind of relates to some previous research I've done, uh, and all the other people, um, that banking systems. where banks rely on relationships between lenders and borrowers are actually in a relatively good position to help their clients right now, and I think we've seen some of these examples in the continental Europe. Banks, of course, do have a critical role in the transmission of monetary policy, we know this already, but now also especially during this crisis in fiscal support measures and so some of them have been already mentioned. I want to Briefly talk about one of them, very specific one on the credit guarantee schemes, uh, that have been, uh, used, um, in several European countries, um, or maybe outside. Um, of course, the question, when we talk about these guarantee schemes, is, um, is that really the right instrument? Um, to which extent are these liquidity or solvency, uh, problems, and to which extent will firms actually be able to repay them? Um, is it just for existing loans or existing credit lines, or is it for new loans that, uh, clients might need to get over tough times? Then of course, again, the question arises, will they ever be able to pay it back? Um, We have two models here in Europe. Uh, the Swiss model has been, um, I mean, maybe seen the FT article, has been kind of praised as a 100% coverage ratio, so 100% government guarantee, and of course, as we know, the Swiss are always effective and they are always over punctual, so the money basically arrived within a couple of hours, uh, as opposed to the UK. Which started with an 80% coverage ratio, so still having skin in the game for the banks, but then also a much, much slower push out of these loans where basically now the Treasury has done a 180 degree turn and is now pushing Asia also for 100% guarantees for smaller enterprises. Now the one point I want to make is that, um, when we come out of the crisis, so this is not exactly a freezer situation, that's what many of us thought, including me, but of course, uh, some, uh, uh, companies will thaw very quickly and get back on their feet very quickly, others will take a much, much longer time. I mean, Norwegian Air. For example, some of you might know them, they don't see any of their planes flying until next year, actually. And of course there will be also a sectoral shift. Some sectors will definitely be on the losing side. Some sectors might be actually on the on the winning side. So the question is really Uh, in the short term, yes, it is all about survival, as, uh, um, as Marcus pointed out. In the end, of course, um, we do wanna have the banking system coming back as kind of, uh, supporting the capital reallocations. We don't wanna create more zombie companies. And that's a Of course an issue that has to be addressed eventually plus of course the losses that ultimately to a large extent the government will have to bear, which of course then brings me back to the the worst case scenario of sovereign debt fragility. Um, and of course in the general question, and I think, uh, also, um, I think Marcus was, uh, mentioned that the, how to deal with widespread corporate failure post lockdown. I'm not sure whether the, I mean, we know from emerging market crisis that the corporate restructuring programs might help. I don't think that has, I'm not sure it has been tried in, uh, in, in Europe yet. Um, Now, as I mentioned earlier, I think the reaction of regulators in Europe has been really quite effective, quite swift, and he actually has shown that the capital buffer that has been built up over the past 10 years, um, have helped in a sense they can now be released. So for example, the SSM released the capital conservation buffer and They also allowed banks to go below the capital, uh, under, uh, Pillar 2 guidance. Some, um, of the national regulators, um, reduced the countercyclical capital buffer to zero. surprisingly to my, to, to me, surprisingly, many countries actually had still 0%, so they couldn't, uh, release anything. But unlike in the US, um, European regulators have called for the suspension of any payouts, dividends, share buybacks, and possibly also even bonuses. So here I think the Europeans have been a little bit ahead of the game. Both SSM, EBA, and even IOA, which is the insurance equivalent to the EBA, to the European Banking Authority, have called for that for a very obvious reason that already mentioned. They have of course been even steps further during the last couple of days and easing on the New provisioning rules, uh, on IFRS 9, also a moratorium, and I think that's on the global level on further regulatory reforms. Um, of course, um, I'm here, I'm, um, I'm getting a bit skeptical. I mean, I know that, uh, Marcus pointed to this kind of, uh, we want to have, uh, evergreening right now. Do we also want to have a loss of transparency? That's a bit of an issue. Um, again, for the next 3 months, yes, longer term, that's, um, a bit of a, a big, uh, question. Um Sorry, now, look, all of this capital relief and the changes in provisioning standards will not avoid the losses, that is for sure. So the losses will incur, um, they will also vary a lot, of course, across sectors and therefore across banks and countries. Um. Banks in, at least in Europe have already been under a lot of pressure. I mean, if you look at the market valuation of European banks compared to US banks, um, they look much worse anyway, and, uh, I think they will come under more pressure because interest rates will stay probably around 0 or negative for even longer now, and the, the, the competition from big tech is of course already strong, and I think the big tech company will be probably one sector. will come out quite strongly from this, uh, uh, from this crisis. Um, here in Europe, um, I am particularly worried about, um, what to do if there are more than a few failing banks. We know that the bank resolution framework as it currently exists in the banking union can work with idiosyncratic bank failures, but not quite, uh, for systemic. bank failures. I mean, that's why even the EBA has now started with plans for like a bad bank, certain recapitalization efforts very obviously similar to other efforts, this would have to be done at least at the euro area level, if not at the EU level, given that, otherwise you would get again the spiral downward spiral of sovereign bank fragility. Um, two, more issues I want to briefly mention. There is, um, there's an issue on, um, um, cross-border spillover effects. Um, now, very specifically in the single market, which is the EU plus, uh, Liechtenstein, Iceland, and, uh, uh, Norway plus, of course, until the end of the transition period of the UK, there's a principle of free capital movement, which Which means that banks should be able to allocate their, their capital within the single market as much as they want, including, uh, um, paying out dividends from subsidiaries to their parent banks, which is not covered, by the way, by the EBA or SSM, uh, uh, recommendation. Um, that's on the one hand. On the other hand, um, there is the fear, especially in smaller host countries, such as in, uh, countries like the Fintech countries and, uh. Central, Eastern, southeastern Europe, that there will be capital outflows such as in 2008, 2009, um, especially again in countries which are heavily reliant on cross-border banks. And there is, of course, the risk of kind of a, um, an arms race to regulatory ring-fencing. Um, now this, uh, the good news is it has been, this is being addressed, I would argue, although somewhat slowly, but there are seem to be efforts, uh, in, on the way, for example, for another version of the Vienna. Initiative to kind of, uh, get everybody around the table, um, and, I guess under the theme of maintaining the single market while making it work for everybody. Now this, of course, has implications also for the developing emerging world, where these issues, both on the cross-border bank level exist, but of course, also the broader implications of capital flows, which kind of gets me a little bit out of my brief because it's more macro, I guess, than, uh, than, uh, strictly speaking, finance. Now, let me use my, I think last 3 minutes or so to just touch upon a couple of issues, um, for, on developing emerging markets. And I think I'm, I'm talking actually more about developing markets. Um, so, um, lower middle to low-income countries. Um, so I guess the good news is that, um, unlike in advanced countries, in some, not all, and many I would say, not all of the developing countries, banks are typically better capitalized, but they're also less diversified. And of course that's especially a concern in uh natural resource based economies as we've already seen in Nigeria, for example. Now, of course, you can also know that the financial system is somewhat less relevant for better or worse, maybe in this case for better in many of these countries. So there might be less of an effect, uh, less, less of a reliance on the banking sector, but also less of a negative effect on the banking sector. Um, Having said this, um, there are increasingly and partly also due to mobile money and to mobile, mobile payment system, more and more countries, even lower middle income countries that have seen kind of a consumer credit boom recently, and that might of course be a definitely a big source of fragility. Um, let me maybe not talk much about the sovereign default risk. Um, um, just point to the fact that, um, uh, I think the, the, the Chinese, uh, debt will have certainly a big role, certainly in Africa and some other, uh, Asian countries. Um, let me finish here on a positive note. Um, I think, um, we might actually see a, uh, dividend, another dividend on The mobile phone banking networks or the mobile banking networks that have emerged over the last 10 years or so. Number one, we know that from researchers in Rwanda, for example, when shocks hit these mobile phone networks, these mobile banking networks can be used for risk sharing within the families or friend networks. And number 2, these might, these mobile money networks might also serve actually for easier, speedier and more effective, meaning, uh, more targeted, better targeted push out of government support programs in many developing countries. I think that's, uh, what I want to say on the, uh, on the, on a positive note. There's much more to say about developing countries, which I don't have the time and certainly my thinking hasn't, uh, uh, really finished on that one. So let me just, in summary, um, And I also talk a little bit about politics, um, So the initial reaction, policy reaction was certainly very welcome, I would argue, especially in in Europe. I mean, that's the one region I know, I, I'm observing best and monitoring best right now. However, I think such as with any crisis, there is some very, very hard work ahead of uh for the policymakers. Um, how to restart the economy. And how to allocate the losses. And I think there will be some very hard political choices to be made, um, which gets of course us back to the whole discussion also on populism, which might show again its ugly face in some of the countries. So, um, do we need another bailouts? I mean, uh, the corporate sector, certainly. I mean, some airlines definitely need would need that. Um, do we need again bailouts in the in the banking system? I mean, we said we never would do this again, right? Do we have to do it again? Um, state aid for firms that don't pay taxes because the headquarters in tax havens. Some countries in Europe have already come up with laws where they say basically, well, if you're in a tax haven, no chance you're going to get any support from us. I think that's probably the right way to go. At least in Europe, maybe even broader, ultimately will there be some transfers, even if only indirectly across countries, because we know that some countries have been hit much harder, partly also because they have been hit earlier and therefore had less time to react and to learn from other countries than some latecomers. And of course the whole question on the taxation, the wealth tax, be it income or wealth taxation, I don't think there's any appetite, at least not in Europe, for any, for another round of austerity, and we certainly do want to avoid another financial and sovereign debt crisis that we had after the global financial crisis. But again, so this will be a very tough choices. On one note, um, I remember from the uh, the conversation of Marcus actually with, uh, uh, Olivier Blanchard the other day, um, that, uh, Olivier made the, Olivier made a very valid point that macroeconomically speaking, at the zero lower bound, uh, there's not really that much difference anymore between fiscal and monetary policy. And what we see right now is that, uh, as, uh, over the past 12 years, the ECB He is taking again the hard work, the hard burden to address the current crisis and to keep the eurozone together. Ultimately I think there are choices to be made not by central bankers, not by technocrats, not by regulators, but by politicians as they are the ones directly accountable to the people, and I think that will be again there will be some hard choices ahead of everybody. Thank you. Thank you, Torsten. Um, finally, we have, uh, to offer additional comments and some synthesis, uh, Alfonso Garcia Mora, who is Global director for finance in EFI, um, so over to you, Alfonso. Thank you very much, uh, Bill, and, uh, it's a pleasure to, to be part of this, uh, panel, amazing panel. I think I have really enjoyed the presentation of, uh, of, uh, of, uh, of, uh, the 4 presentations that we had before. And actually I find some joint or or similar trends or messages in many of the, from many of the speakers, but also some nuances on some of the of the recommendations, not that maybe are good if we have time, it would be good to, to discuss a little bit more. I think that there is a, there is a first point which is this dilemma that we have. Beginning of the crisis, not saving firms versus saving households. How far should we go with firms, or should we focus on livelihoods? But I think that there is evidence and I think that all of us think that actually saving firms is a way of ensuring that the economy can also recover more productively in the next phase. The second one, which I fully agree as well, also is the current infrastructure was not prepared for this crisis. I mean, it was totally impossible to predict something like that, and we were not prepared for this. And therefore this is all this comes to all the extraordinary measures that we need to take. The idea of firms to hibernate, I think is very, it's a very strong idea. It's interesting. The issue is, to me there are two questions here at least, but I will come back with the questions later on. One is for how long? I mean, how long can we keep the firm, firms on hibernation and what are the consequences that it may have down the road linking to what Tom. As Torsten was mentioned in terms of financial sector stability, no, and I think that this is key because one thing is to keep the financial or the firms in the nation but during a couple of months, and another one is to think that this is going to actually take us or take us for 1010, 10 months or 1 year, and maybe the consequences are very different. But also in terms of how do we do that, I think that there are 3 key issues. One is We need to provide financing so credit flows, and here I think that there is a very big discussion on targeting, which is non-trivial discussion. Because targeting, even if we want to target, it is not easy to target because we don't have information to target in many cases, because how do you set the principles for the targeting? I mean, are those firms that are more affected, are those firms that could be more affected, are those firms that were more affected? So it is not easy to define what is the criteria for the targeting and even less to have the information needed to really do it properly, no. But second and probably before even the targeting is how to reach out to that part of the productive economy, especially in developing countries that is informal, because we know that actually not so many firms have access to the financial sector or to the traditional financial sector, and therefore it may complicate significantly the situation. But third is the uh vulnerabilities that uh Sergio was also mentioned, not the initial vulnerabilities that we have and that we face in many countries. So when thinking of keeping the credit closes or what we call in, in FCI in our team, uh, keeping the lights on, uh, this is, this is not, it's not so easy a a question of how to implement it, no? First, uh, basically because maybe you cannot target all and therefore you need to decide. Uh, where are you going to put your resources? And second, because I think that the key question, and I will come back in a minute to that, in this crisis is how are we gonna Distribute the losses. Who is going to take the economic losses of this crisis? Uh, and this is very important, especially for developing countries. The second piece of the implications of the firms to n is the forbearance and not related to forbearance, evergreening, or however you want to call it, which we know that depending on how you do it, it may have significant consequences down the road and therefore the design of any of these activities is absolutely critical. And the third one is this idea of survival versus creating zombies, and when the rapid implementation or the stability. If there really exists a trade-off uh among these uh among these uh uh issues, no, so I have just, I have prepared a very brief uh presentation. I don't know how. OK. OK, so let me, let me go to, to the brief presentation that I have prepared because one of the things that we had in mind when in, in FC when we decided support in terms of resilience is that the objective function is quite clear, but there are two big questions. One is If we should, if the policies should be different depending on who are you targeting, and policies for informal firms will be different from micro and small firms, and this will be different from large firms, and this will be different from state-owned enterprises. So at the country level, we need to differentiate between the typology of firms that we think that we want to support or that we want to help. And there is a huge restriction or constraint in this model, which is the fiscal and the financial sector capacity of the countries. And I'm saying that because when I was drafting or thinking on my presentation this morning, I thought, OK, in terms of discussion, the issue to me is, as I mentioned before, should policies target all firms? Probably we don't have capacity to. Does it matter that theology of firm? We think it does. The market structure matters informal, formal and size. But also sectorial. Third, is it a question of liquidity or solvency? Because many of the decisions and policies that we were mentioning before, like, like for instance, doing repo financing with the central bank, the final or the main issue here is who is taking the risk. I mean, if there is a default, who is supporting this this this this. This trade flow, who's taking the loss, no? And here is where the restrictions of the model come. First of all, how can emerging markets and developing economies design policies with much less fiscal, monetary and financial space than advanced economies. And this is the elephant in the room for us at the World Bank these days, because we know that what Europe has done cannot be done by many or most of the developing economies because they don't have the fiscal capacity to do that. They don't even have the monetary capacity to actually expand the central bank balances to provide part of the monetary stimulus that has taken place in other countries, and exactly the same with the US. So how do we design an optimal policy package with this restriction in the model? And second, because many of the developing economies have significant vulnerabilities before the crisis started, vulnerabilities in terms of weaknesses in the banking sector because of the bank sovereign elections, huge bank sovereign elections, and therefore a very important potential negative feedback loop down the road because they have a very high corporate indebtness and therefore much more limited capacity to continue getting or absorbing more debt. So in that, in that. To me that's the question that I would like to bring back to the to the speakers, how to design policies and how your your your actually your proposal fits or could be applied to developing economies. I'm not going to talk about the day after because to me, one of the big things that we will have and we will need to do many more webinars in the future is how credit risk is going to change going forward, because I think that this crisis is going to change many parameters of of the of of trade assessment. And, and just to finalize before going back, I think that there is, uh, I just wanted to flag what countries are doing. So we are trying to monitor what countries are doing around the globe, uh, both to support firms and through financial sector policies. And uh just to show you a couple of graphs, in terms of SME support, this is based on almost close to 1000 measures taken by 120 countries in the world. If you see, uh, more or less 1/3 of the policies have been focused on debt finance, so basically supporting financing of the firms, but actually a very similar percentage has been focused on employment support and also tax relief has been a very important part of the of the of the measures taken. But when you differentiate by income of the country, it is quite interesting because actually those low income. Countries are the ones who are focusing much more on debt financing whether high income or high middle income countries are using employment support or tax relief to actually support firms, which is quite an interesting different approach from one and another typology of countries. This in terms of firm support, but when we look at the financial sector support again based on 150 to 150 countries, what they have decided so far, you can see that most of the actions have been related to prudential measures, liquidity and prudential measures. These are the two big areas where regulators are focusing these days, and actually the Split by region is very similar, so prudential measures, there are more than 100 countries that have already taken actions and decisions on a prudential regulation to try to support the economy, and it goes across the, across regions. But when we think about, OK, these prudential measures, more than 100 countries, what are we talking about? Are we talking about those measures that are what we call bucket one, so basically measures that make use of existing flexibility in the prudential framework, like Thorstein was mentioning in Europe, no? So basically, releasing capital buffers, conservation buffers, countercyclical buffers, or easing other macroprudential measures, etc. So those are actually we have been designing. When drafting the regulations in the previous years, or are they going to the second bucket of measures which are the ones that we say can be used at the discretion of the regulator and supervisor and go beyond the flexibility foreseen in the existing framework, but which do contradict the spirit or the principles of global prudential standards, and here there are a significant number of countries that are taking decisions, especially related to support and facilitating restructuring of loans, which can be kind of evergreening or forbearance that we were mentioning before. But if we go to the third bucket, which is the Extraordinary one. This is the one that relates to totally unprecedented regulatory forbearance measures. So basically things that we didn't have in our regulation and that we were not, this is like what what Sergio was mentioning, the infrastructure was not prepared. OK, these are the new things that actually we are bringing to the regulatory framework to try to deal with the current situation. And here is what I would like to flag the attention of, and I would like to get your views, because if you look at the table, 60 countries in the world, actually 70 countries in the world are doing either credit repayment moratoriums or relaxing days past due norms for NPE classification or are not traditionally accordingly to the norms. So this is non-trivial, especially in developing countries, because we know that these type of decisions can have a very negative impact on the road, and there are you wrap up the countries were, yeah, so this is what I would like to finalize. So my two big things or points are, I think that we, the narrative is quite clear. The the key issues are, in my opinion, what to do when you don't have the fiscal space and therefore you cannot use the guarantee of the sovereign guarantee to support part of your policies and how to deal with forbearance, especially in those countries that where the implementation capacity is very limited. Stop here. Thank you, Bill. Great. Thank you very much, Alfonso. OK, so, Alfonso posed a couple of questions to the panelists. There are also a couple on the web that I'm going to synthesize as the following. Uh, the first is about burden sharing, which came up under Thorsten's presentation and also Alfonso measured it, uh, mentioned it. Which is, we're talking about huge amounts of money, um, how should we be handling this support to firms, um, such that in the end we don't wind up with people saying, again, you bailed out the financial sector, you bailed out this or GM and have a backlash last, like last time. The second one is, we're not allocating on the basis of whether you're a successful firm or not anymore. The tourism sector is dying through no fault of its own. How do we go about allocating credit, uh, limited credit among those sectors? And the third question was, um, will rating agencies, when they're viewing countries, see this as kind of a one-off, idiosyncratic event, or do we expect sovereign ratings to be really damaged by this? Anybody can jump in if they'd like to answer those small questions. Perhaps I, I can say a few words. Uh, I, I like all the presentations. I think that's great. And also the fiscal space. Uh, I don't have a clear answer yet, but, uh, One has to keep in mind that if you don't intervene, the GDP will go down and the fiscal space might be even worse. So you have to go to the maximum at this stage, uh, in order to uh make the situation not worse. So the fiscal space is something endogenous moving around as well. So there's not much choice uh at this juncture. But the allocation of credit and the burden sharing. So I think what has to when you open up, I mean, what you mentioned this staggered recovery and was mentioned that policymakers are at the critical juncture to make the decisions. And I totally agree with them. But the next decision for policymakers is how to open up the economy. And then the question is, which sequence you open up across different sectors. And there is a huge lobbying pressure coming to the politicians. And this will lead, if you open up certain sectors or include certain sectors in the first phase, they will then also get more funding from the banks. And, and that actually is done at the expense of the other sectors who cannot open up. So that's the one has to be careful on, it's in the sense of what the bureau said, the credit line. So, who will get the additional funding from the banks, it's a sector which gets opened up early. And we don't want to go that route that it really favors certain sectors tremendously and that there's an endogenous favor through the banking sector coming on top of it. So we have to watch out that the banking sector is not, you know, reallocating, distorting things across sectors and also across large and small firms. So it's very clear in the stock market that All firms suffer way more than large firms. And that also hits the emerging economies, uh, much more severely as well. I very much like the, the informal risk sharing through mobile phone banking. I hope that this will help the emerging economies, in particular, that was a very nice insight. And a positive message which I always like at the end. Thanks a lot. Anybody else wanna, anybody else want to jump in? Yeah, maybe I can just, uh, say a few things, but can you hear me? Uh, yes, you are, yeah, just a couple of things. I've, of course, being from India, I've been watching closely the policy response, etc. but I think it extends more broadly to other sovereigns. Uh, I think the challenge is the following, which is that I think the rating agency, there is a permanent shock to endowment. So I don't see how rating agencies can ignore that without basically saying, listen, we are going to completely alter our mapping from credit ratings into probabilities of default. Uh, so I see it means they, they've already downgraded a few countries by a few notches here and there or changed their outlook, and I think they've got to do their job. I think we've got to let them assess credit risk the way they want. I think the challenge is that some countries have stable financial sectors or stable external sectors. Whereas others are relatively fragile, they're very reliant on what money flows, and banking sectors are not very well capitalized, and I think then the issue that Marcos raised becomes sort of very challenging, which is, do you sacrifice the sovereign's creditworthiness. And that is the efficient response. But if that means sacrificing your financial sector or the external sector, have you factored in that, you know, that consequence of the sacrifice that you're making? And I think it's a, it's a, it's really a choice between two terrible outcomes in my view, I think. Many of them will have to, I think, just feel the waters, I think, as they go along, and I think my sense is the reason why you see a lot of inertia in the fiscally stretched countries and emerging markets in announcing large policies compared to the safe havens is because for them, some of their bond market and external sector conditions are heavily endogenous to their policy decisions. Whereas I think for safe havens they can take them as essentially borrowing at very low cost. And so I think the approach I see therefore, given the tremendous fog of uncertainty that these countries are moving very, very slowly in their packages, even though the humanitarian crisis on the ground might seem to want to demand otherwise. I don't have a sort of a great solution unfortunately to propose it's just that. Overall, I feel that if for the very stretched countries, if the multilateral agencies were able to create some debt relief, but ensure that the proceeds from the debt relief are targeted towards the most essential expenditures, I think that might be the best outcome for these countries in the short run. Uh, you know, there's a Patrick Bolton etal proposal of creating sort of like a, like an account. Of relief that has been given to a country, getting all the private creditors to participate in it as well, and then ensuring that, you know, you kind of use this checking balance, so to speak, when expenditures are undertaken for the essential provision of services in these countries, and I think it seemed like something that we may have to entertain for some of the poorest countries because otherwise they will, they are caught between a rock and a hard place, and I think. They will end up being an inertia unfortunately. Yeah I just stopped there. Other thoughts? If I can come in very briefly, please go ahead. Um, oh, thanks. Um, so maybe first to, um, answer to a couple of questions, um, from Alfonso. Um, on the reaching out to the informal sector, maybe let me frame this question a little bit more broadly. Um, so I think, uh, it really depends on the economic, uh, but also institutional structure, uh, of countries, how to best, uh, push out this aid. And, uh, again, if I look at the UK, um, the credit. Guarantees or the support going to the banking system didn't quite work and I mean of course those who live in the UK know that the banking system is not exactly the most efficient one, but of course it's also the issue of the coverage ratio and the guarantees. On the other hand, had seemed to have worked quite well in the UK is these grants or these payroll payments that went out to firms because it was linked to the HMRC, so the British IRS, the tax authority, I guess. Countries, I mean, the, the US seems to go also heavily for the uh kind of sending out checks, and I guess that brings me to the informal economy. I mean, informal meaning not registered, not, um, um, under the radar screen basically. I guess the only, uh, way to then, uh, um, uh, coming back also to your question on firms versus households, in this case, it is really about targeting households. It's not about targeting firms because you can't target the informal firms. You have to target the households in this context. I think, uh, again, uh, I guess India has a good, uh, um, Um, uh, could have a head start theoretically at least given their, um, and, um, I can remind me what the system is called the, uh, the, you know, the new ID system, um, uh, um, uh, in other countries that are, and again some African countries the mobile, uh, money network might actually, uh, work as well, and of course the mobile phone system I think has been actually used in some countries already to, uh, to push out, uh, support payments, um. On the forbearance, yes, so I'm very, I'm, I'm a bit, uh, double-minded here. So on the one hand, so what the, I think the, the European authority, and again it's an ongoing discussion with new decisions coming out almost every week or every day, it's kind of to say, well, you know what, um, uh, telling the banks, you know what, um, just let's pretend, uh, the economy is in the freezer and uh don't downgrade firms because of the current situation, don't uh uh borrowers or of firms. Um, let's pretend, uh, in 3 months, 6 months or whatever, it's, uh, gonna all be good. And that's also kind of relates to this, uh, discussion on, uh, on the IFRS, uh, 9, provisioning rule, which would be more, much more forward looking rather than backward looking. Um, now, of course, there is again a limit to that, right? I mean, uh, how far do you want to go to let the forbearance go? And is it maybe better to do capital relief. But in a transparent way, but then still force the bank to recognize the losses. So I'm a bit, uh, split mind here. I'm normally more in favor of, uh, transparency, but of course, I also see the, uh, the, um, the, the shortcomings there. And which actually brings me to the other point, the, on the rating agencies. Um, and again, so this is a little bit like what is the, the, the AA is the new BB or it's the other way around. The, the, the, the double B is the new AA or so. Um, Uh, I mean, one way the ECB has kind of shown one way to do this is basically to say, well, we, we're just going to ignore that. We, we're going to ease the collateral requirements and even in the worst case scenario, if Italy becomes junk, uh, Italian sovereign bonds become junk, well, so be it. We're just gonna keep them, uh, do it anyway. Uh, so I think that's, uh, that's I guess one way to go, but again, you have to remember, of course, all of these are relative, uh, ratings. Um. Sorry, then, um, I guess the, uh, on the burden sharing. Um, there came a question up. So this, there is now, there are a couple of very interesting papers, um, on comparing the current situation and the funding of these losses with situations after the war, after World War II, for example, but actually the, the, I mean, countries like the UK and that the, the, the, the peace period with um debt to GDP ratios of I think like 200% or so, um, or almost 200%, and that basically was brought down by high marginal, uh, taxation. A tax rate, but also by financial repression. Now I'm not sure whether I want financial repression because that's exactly what would happen if there's no fiscal burden sharing in the Eurozone. Um, so, but the higher taxation is certainly one way to go, uh, and there are discussions on the wealth tax. I'm not sure how realistic these are actually are, um, in, uh, in Europe, um, but of course all of this might be, have to be distributed over several generations. Um, Uh, yes, so, on the, um, the targeting across different sectors, I guess only one small way, and again I know this is very Europe specific, but again, as I mentioned, several countries have now put rules into place that firms can only receive state aid if they do not do any payouts, if they do not do any dividend payments. Um, of course that refers to, to large companies. Much less to the small companies where we have a very different, uh, situation. And finally, on this fiscal space, I completely agree with Marcos, uh, it's an endogenous concept, and, uh, the debt to GDP ratio is a ratio, which has two parts to it, um, which the, uh, UK, uh, after 10 years of austerity found out, uh, uh, the GDP actually, uh, the, the debt to GDP can go up even if you reduce the deficit like crazy. Um, thanks. Great. OK, we have unfortunately run to the end of our time. Um, I want to thank, um, all of our distinguished panelists, Sergio, Sergio, uh, Um, Thorsten, Viral, and Marcus, um, for end of, uh, Alfonso, for excellent presentations and discussion. Um, we hope to have you back again and to talk about, uh, some of the finer points of this as we go along. Thank you very much to everybody. Thank you very much

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Financial Sector Policies to Salvage Firms Hit by COVID 19 eSeminar

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Financial Sector Policies to Salvage Firms Hit by COVID 19 eSeminar

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