Answer to Question #241002 in Management for patricia connor

Question

Provide a critical analysis and discussion on how the COVID-19 has affected the strategy of banks. Your response should include four monetary policy and central banking actions that are used to respond to the pandemic and the management of liquidity. 

Answer 1

How the COVID-19 has affected the strategy of banks

The COVID-19 pandemic struck at a time when many central banks were already struggling to boost inflation occasioned by the activities of the last decade. The COVID-19 increased the market volatility and there was need for banks and central banks to create monetary policies. Central banks quickly turned to measures adopted during the Global Financial Crisis (English et al. 2021). Below is a list of four monetary policies and central bank actions used to respond to the global health pandemic.

Interest rate cuts. The Central Banks moved towards strategies aimed at easing the strains in the markets occasioned by the pandemic. Central Banks moved towards supporting aggregate demand and helping economies rebound from the effects of the pandemic. For example, the Fed moved towards cutting its target for federal funds rate. Banks would now borrow at a cheaper rate from other banks. By cutting the federal funds rate, the other rates had to come down. 

Liquidity provision and credit support. Many banks and people had to close their operations as a result of the pandemic. Central Banks moved towards providing the monetary funds to financial firms and nonfinancial firms. The move meant that viable firms could survive the pandemic. 

Regulatory easing. For example, banks reduced the number of requirements for them to offer liquidity to viable businesses. Many banks are closely working with borrowers in their approach towards nonperforming loans. Banks have rescheduled some loan payments to flexible terms to offer the payer sufficient time to repay the loan.

Using liquid buffers. Many banks across the world have been forced to operate below Basel III liquidity coverage ratios (English et al. 2021). Several central banks have eased liquidity coverage ratio requirements when it comes to foreign exchange.

Reference

English, B., Forbes, K., & Ubide, A. (2021). Monetary policy and central banking in the Covid era. CEPR Press.