Wednesday, Jul 15, 2020
Pandemics and Financial Stability (Part 2)
This is the second part of a Toronto Centre Webcast Series to help financial Supervisors and Regulators gain insights and perspectives on COVID-19 and its impact on the global financial system from supervisory experts. This episode features:
- Socorro Heysen – Superintendent, SBS Peru; Toronto Centre Board Member
- Vincent Reinhart – Chief Economist and Macro Strategist, Mellon
Full transcript
March 24, 2020
Babak Abbaszadeh:
Good morning, good afternoon, good evening to our global audience. Welcome to Toronto Centre's
second episode of Pandemics and Financial Stability. I understand we have several hundred people
who've joined us. This is very encouraging. We had a very exciting session last week with a very
important message from the WHO and their prominent supervisory authority, who's a member of
Toronto Centre's Advisory Board for Insurance and Pensions.
Babak Abbaszadeh:
The key takeaway of that first session was, we must listen to public health officials. This is serious.
Second, we all need to have robust business continuity plans, and that's not just financial institutions
and supervisory authorities. I think we all are seeing that in various sectors of the economy. Finally, we
must bring unprecedented resilience to these times of uncertainty as we apply the difficult lessons we
are learning every day.
Babak Abbaszadeh:
The coronavirus is rapidly rising. The latest count in the US now has surpassed 46,000. Canada has
surpassed 2,000. And one of our speakers here is actually in Lima, Peru. Their cases are approaching
400, which is the number Canada had in less than 10 days ago. So we're all in this together.
Babak Abbaszadeh:
But it's not just about the pandemic and the virus. Global economic anxiety about uncertainties of the
impact of coronavirus continues. Just very recently the President of the US FED in St. Louis said that if
nothing is put in place to mitigate the impact the unemployment rate in the US in the second quarter
can rise up to 30%. That's a staggering number. But to put it in perspective for you, the unemployment
rate in the United States during the Great Depression at it's highest in 1933 was 24%. So you can see the
dynamic here.
Babak Abbaszadeh:
We have two very qualified and internationally renowned experts. Before I introduce them I would like
to thank Toronto Centre's key funders, Global Affairs Canada, Swedish International Development
Corporation Agency, the International Monetary Fund, Comic Relief and Jersey Oversees Aid, without
whom we could not bring you the programs that we have, today the virtual realm.
Babak Abbaszadeh:
Our two noted economists and speakers have tremendous international experience. I'm not going to
read their full bios. You have them and we're also posting them on our website. But I should say
something very briefly about each.
Babak Abbaszadeh:
Ms. Socorro Heysen is the current Superintendent of Banks, Insurance and Pensions in the Republic of
Peru. She's also a member of Toronto Centre's Board of Directors. Formerly she worked at the Central
Bank of Peru and a senior official at the International Monetary Fund. She holds a Master's Degree in
Economics from the UCLA. She's a fantastic speaker.
Babak Abbaszadeh:
Vincent Reinhart is Mellon's Chief Economist and Macro Strategist. In this role he's responsible for
developing views on global economy and making relative value recommendations across global bond
markets, currencies and sectors. Previously he was Chief US Economist and a managing director at
Morgan Stanley, a resident scholar at the American Enterprise Institute. He was in the US Federal
Reserve System for more than 24 years including with responsibilities at the Federal Reserve Bank of
New York, which is at the forefront of supervision of financial institutions. And he is a noted academic
with numerous publications with a graduate degree from Columbia University.
Babak Abbaszadeh:
So without further ado, I would like to go to our speakers and ask each of them a very basic question.
Each of them has seen many global financial crises and other crises throughout their careers. So let me
just ask you each, Vincent, how is this crisis different?
Vincent Reinhart:
I haven't seen a crisis like this in my lifetime. I don't think any of us have. And it's for a couple of reasons.
One is, we're getting the disruptions to economic activity first without the associated kick of a wartime
economy of mobilizing resources. And second, it's both advanced economies and emerging market
economies. Usually the global plane has one engine still firing. They don't all sputter at once. The last
time this happened was in the Great Depression.
Babak Abbaszadeh:
Vincent, much of the impact of the coronavirus has thus far been directly on the real economic rather
than through the financial system. This impact has varied considerably by country and region. These
impacts may be temporary but they may not necessarily be reversed rapidly. What is your view on the
long term negative impact on the real economy and to the global financial sector in particular?
Vincent Reinhart:
I think there are two parts to that answer. The first is we're definitely on the downward slope, both in
terms of our vulnerability to the infection globally. The disruptions to economic activity as we try to
mitigate that, and the withdrawal from risk taking that is associated with big capital losses on global
markets. The problem is that is exposing weaknesses on corporate and national balance sheets that
could lead to permanent losses, businesses closing, countries defaulting. And that's a permanent scar.
Vincent Reinhart:
The second part of it is I don't think we will get out of this with the same attitude toward globalization.
We will be much stricter at borders. We've seen already that the notion of a single market in Europe
gets broken down if it involves shipping medical supplies across the border. That countries have closed
their borders, and that's going to be a feature of our future, less globalization, harder borders.
Babak Abbaszadeh:
Socorro, if you can hear me, what is different abut this crisis?
Socorro Heysen:
Okay, well let me first start by emphasizing that this is an unprecedented true global event, just as
Vincent mentioned. There's a lot of things that are different from this crisis regarding the 2008, 2009
crisis. Starting from the most obvious, the financial systems and the regulatory frameworks and the
supervisory agencies are in a stronger position right now, or were in a stronger position than before,
during the previous crisis.
Socorro Heysen:
Also, the origin of the shock is different. The origin of the shock in this case is not the financial system,
but from outside of the financial system. And because of that perhaps financial regulators and
authorities were not prepared or had not thought of a scenario like this at all. But I think that the most
important difference is the high degree of uncertainty that we have to deal with.
Socorro Heysen:
In any crisis, there is a high degree of uncertainty and authorities have to make decisions with
incomplete information and a high degree of uncertainty. The difference here is that, and certainly here
the sources of uncertainty are more diverse and could be very difficult to grasp for economic and
financial authorities because it's not our field of expertise.
Socorro Heysen:
In this case we have to coordinate, we need intensive coordination among ourselves of course, as
usually domestically and internationally, but also with other government authorities that are in a
different field and that generally we do not communicate with them, or we have not found a need to
communicate like health authorities or police authorities. So this presents new challenges. And let me
stop it like that with my answer to your first question.
Babak Abbaszadeh:
That's great. Thank you very much for that answer. It was very succinct and to the point. I would also
like to let our audience know that you have a chance to ask questions. If you would like to ask any
questions please use the Q&A function and the questions will be fed to me and I will make sufficient
time for as many questions as possible to be read.
Babak Abbaszadeh:
Socorro, let me ask you a followup question to you. You already touched a little bit on that, but this is a
chance for you to elaborate a bit more. So, supervisors currently should monitor economic and market
developments, monitor the solvency and liquidity of individual financial institutions. In fact, they do this
all the time. Intervene as necessary. So a lot of important core rules for supervisors just on a daily basis.
Now, in the context of the coronavirus, what issues have arisen or may arise for financial sector
supervisors in these core roles?
Socorro Heysen:
Yeah, let me say that we had to rebalance our supervisory activities and priorities to deal with this crisis.
We had to stop some of the... Well, of course, we had to stop altogether onsite activities for obvious
reasons and reduce some of the reporting and focus on things that are more relevant for resolving the
short term challenges of this crisis and for addressing the long term issues that may be arising.
Socorro Heysen:
The first thing, we have to focus on monitoring the operational capacity of financial institutions to be
sure that they can operate in a proper way in this context. There are, for instance, in our case several
difficulties for financial entity's staff to reach their locations of work, their work locations. And that
made it difficult for some bank branches to open.
Socorro Heysen:
Also, the most important problems were with service providers, because they were initially not
considered as priority sectors. Service providers like IT service providers for banking institutions, or call
centers for banking institutions. And the staff could not reach their locations and that created choke
points especially in answering clients questions and requests. Because in the case of banks for instance,
lots of clients were calling to wrap around their loans or refinance their loans and the call centers were
not working at the necessary level at the beginning.
Socorro Heysen:
The same thing happened in the insurance company in which citizens were calling to ask for health
coverage and they had lots of questions. And the call centers were not working properly. There was also
a choke point there. Fortunately these issues have been resolved.
Socorro Heysen:
The second issue that we are dealing with is a [inaudible 00:12:19] of liquidity issues. Changes in
liquidity patterns, changes in deposit withdrawals and bank revenue. And this affects not only banks, but
also insurance companies because of some of the delays in collecting premiums for insurance which can
cause liquidity problems for insurance companies. But also, and more importantly it can cause problems
of lack of coverage if not addressed properly for people in the time in which they most need it.
Socorro Heysen:
Third is the monitoring of credit risk. We have to look carefully at bank portfolios and create specific
reporting for all, and more frequent reporting for refinance loans and to understand what is going on
over here with credit risk. And also monitoring the new credit granted to see the flow, if the flow of
credit is moving at the correct speed. For instance in the first week of isolation what we had is that
several microfinance institutions that rely a lot on person to person contact for granting credit were
operating at one-tenth of their normal credit flows. And the last issue we're monitoring, of course, is the
value of financial instruments for all banks, but mostly for insurance and pension funds which have very
large portfolios of financial instruments.
Socorro Heysen:
Another important issue is the coordination among authorities. We are working very closely together
with the Financial [inaudible 00:14:07] Council and also in close contact with the industries at different
levels of staff. And also providing information to the public, either through our social media or with a
special section that we have created in our web page, for instance. And all these are issues that have
arose, the need to leave some of the financial regulations but I think you're going to ask about that later
on.
Babak Abbaszadeh:
Yes, thank you so much for that and the degree of disruption is big. Vincent, I'm going to turn back to
you. Coronavirus and it's impact on the real economy also affects the financial sector. This is very real
for all of us, real economy financial sector. For many of us it looks like our retirements are going up in
smoke. I have family and many friends who are owners of small businesses or professionals who have
been forced to lay off their key staff and members. So, the impact is real.
Babak Abbaszadeh:
This has included shortfalls and greater volatility in equity and other asset prices. We see that on a daily
basis with DOW and NASDAQ and everything, a deterioration in many borrowers credit worthiness, etc.,
etc. What are the early lessons so far?
Vincent Reinhart:
The early lesson is if you disrupt economic activity, even if it's for the good cause of mitigating the
spread of a virus, it can have relatively immediate and painful effects on lots of business models.
Something like 45% of US workers are at firms that are under 250 employees. They don't have the
resources to withstand much of an outage. And this is more than just a short outage, it is a serious
disruption to their way of life.
Vincent Reinhart:
Meanwhile, there's been a withdrawal from risk taking. I think the surprising thing is the extent it has
also been a withdrawal of risk taking by key intermediaries. So there is less linking of markets across
different instruments and across different countries. Essentially, big banks are husbanding their
reserves, trying to keep within their regulatory guidelines, capital, and leverage. And they're not taking
the opportunities to smooth bumps in markets. And so we're having more bumps in markets.
Vincent Reinhart:
So part of the reason why volatility is higher is markets are just that much less efficient. And I think
there's a back office issue as well and that is everybody had their own resiliency plans, but nobody really
appreciated what would happen when everybody did it at the same time. And so when you have traders
working from their kitchen, when you have less resources, you're just finding out that markets are
functioning more poorly.
Babak Abbaszadeh:
Yeah. That's true, and even forget about the markets, just looking at ourselves we are trying to deliver a
lot of programs and services online to the virtual domain, and I think we're not the only one. Everyone's
trying to do that. And just the pressure on the telecom system that provides the internet must be
staggering, and we're just going to get into that. So I think I can identify with that.
Babak Abbaszadeh:
Socorro, coming back to you, the coronavirus outbreak demonstrates the importance of business
continuity planning by supervisory authorities and regulated financial institution, crisis preparedness
and crisis simulations. In fact in our first episode, as I mentioned earlier, business continuity planning
was the number one issue that a lot of supervisory authorities were asking questions about.
Babak Abbaszadeh:
So, you are actually living your business continuity planning right now. Your own institution's under
difficult circumstances. What should be the supervisory response to increase working from home by
regulated financial institutions? And similarly, for supervisory authorities, what is their capability for
effectively carrying out their own responsibilities in light of working from home? Accessing
confidentiality, decision-making, communication with regulated firms, and with other authorities.
Babak Abbaszadeh:
Just to give you an example, just yesterday my own wife needed some personal information about one
of our daughters for the return, filing the tax system and she couldn't get a hold of the bank. She tried so
hard all day. And this is a bank in Canada. So you can just see the dimensions of this. So I would
appreciate any insights you might have on this, please.
Socorro Heysen:
Well, I think, first let me start with financial institutions remote work. I think we have to allow remote
work in this circumstance, but it is more likely to work if prior arrangements have been done, like bank
continuity regulation and clear mandatory testing of business continuity plans, and comprehensive
supervision of these plans and the testing. All these supervisory prior actions should have included
service providers to be sure that service providers provide adequate security for the continuity of
operations in this circumstance.
Socorro Heysen:
If the financial system did not have these prior, they're going to have a very, very difficult time operating
remotely under these circumstances. In our particular case we have found that about 50 or 60% of the
key staff of financial institutions are working remotely at this point in all large institutions. And this
number grows up to between 70 and 100% for the insurance industry.
Socorro Heysen:
There are some issues that we have to consider. Clearly there are some activities that cannot be
executed remotely, either for the type of business model, or for security reasons, or for other reasons. I
mentioned before the difficulties that microfinance industry is having in granting new credit because of
the business model demands for person-to-person contact to assess the capacity to repay of the
borrowers. And the same layers of control that the microfinance risk management systems have also
requires supervisory on-site visits to the business. And if the businesses are not operating, therefore the
credit cannot be granted. So that's the first thing.
Socorro Heysen:
The other thing is some of the remote activities cannot be carried out for long periods of time remotely.
One thing is to operate remotely for a couple of weeks, and another thing is that you're going to operate
for 30 days, 60 days, remotely. Many of the activities are going to suffer tremendously.
Socorro Heysen:
The other thing is that technical and technology capabilities have to be continually tested and, of course,
during the emergency response the most important thing for financial entities is to be aware and careful
about the health of their own workers. And this limits the operation of some of the channels of the
banks. For instance, they have to have protocols, what to do if a bank employee becomes infected with
the virus. A couple of branches in some banks in Peru had to close because of that reason.
Socorro Heysen:
And then, of course, the role of supervisors in this country is to continue looking and monitoring the
operation of the system and be sure that the system is addressing all the problems that they may have
in them. And we have done that in the early days and now the operation of the system is improving. But,
as I said, this is something that can be done on a short period of time, not on a very long period of time.
That from the point of view of the banks.
Socorro Heysen:
From the point of view of the supervisory authorities, the capacity to work remotely also will depend on
some prior arrangements that people may have done earlier. To have enough laptops for the
supervisory staff, secure communication protocols, cultural issues, management, proper organization to
manage the workflow, and an identification of the key staff and alternate personnel in case the key staff
is not available for any reason. So strategies, it's optimal that strategies were developed ahead of time
to consider all these issues.
Socorro Heysen:
In our particular case we had prior testing at some department levels, but not as a strategy of the whole
organization to operate remotely. So, once isolation was declared it took us one full day to have all the
critical staff operating fully remotely. We are learning along the way. The first day of isolation, as I said,
most supervisory staff still came to the office. And this day was used to address all the urgent issues like
locating the laptops, the remote access permits, determine that the laptops, iPads, phones, have the
necessary software, reminding everybody of the security protocols, among others. Our IT staff worked
very hard to get us up and running remotely very quickly and we are very happy about that.
Socorro Heysen:
On the second day of house isolation about only 40 supervisory staff went to the office and now about
10 people out of a staff of about 1,000 people are in the office at this current time. Some of them
helping me resolve the technical issues of this webcast.
Socorro Heysen:
So, fortunately, we do not have staff infected by the virus but we have established protocols for this
event. And we have succession plans and alternate staff to replace key staff if necessary. And that's
what I would like to say about this.
Babak Abbaszadeh:
Thank you very much. I think what you're underscoring is how much you are actually deep in the
trenches. This is a real situation. As I underscore you are living your business continuity plan. And we're
beginning to get questions from the audience so I'd like to shift to them. There's one comment I'd like to
read and a question I'm going to pose to Vincent.
Babak Abbaszadeh:
A comment from one of the viewers is, "This crisis highlights our ever increasing reliance on sound or
robust IT infrastructure. We need it for financial transactions and relationships, but also for the delivery
of care." I couldn't agree more.
Babak Abbaszadeh:
So Vincent, this is a question that I think I heard echos of it in our first episode as well. It's unfortunate
that this crisis broke right in the aftermath of the steady efforts to dismantle the World Global Trade
Infrastructure by certain countries and foreign leaders. So, the question is, "In the context of hardening
borders and shift away from a distinct globalization from previous years, how do you perceive further
developments of the existing business networks, both real economy and financial system perspectives?"
It also, in my view, touches on the fact that the global coordination seems to be a bit, either lacking or
weak, this in the early stages of this issue. But, bringing it back to the business networks, what is your
view, what's happening here at this point, or what will happen?
Vincent Reinhart:
Oh, I think in some sense the tariff wars and trade disputes of the prior year and a half was a test run for
understanding what happens when borders close. Now we're seeing it in real time and in a much more
intense fashion.
Vincent Reinhart:
Chances are, given everything we've learned, supply chains are going to be less crossing national
borders because you can't be sure whether you can always cross that national order. And they will also
be looser than previously, i.e. no manufacturer reliably should get all their product from one province in
China. So it's a looser more interconnected supply chain, more country specific, more looking for
obvious regional trends. And I think that's going to be a more permanent feature of that network.
Vincent Reinhart:
I think also do not be surprised if we see more capital controls, that governments on the back end of
this, will have much more debt. They will have to fund that debt and they'll have central banks that will
be seeking to re-normalize policy, whenever that time comes. They are going to be uncomfortable with
the free flow of capital and so in some sense we're going back about 70 years.
Babak Abbaszadeh:
That was a very sobering account and unfortunate, as I said, the timing. Socorro, this questioner actually
mentioned you by name so I'm going to pose the question to you. "A joint statement was released by a
central bank and banker's association which gave specific steps to be taken by financial institutions,
which included a moratorium on loan payments. Do you think this sort of thing is a wise choice by the
Central Bank to provide such details? Would the public rather then have such discussions with their
licenses?" And just for our viewers, I'm reading everything as it comes in. Socorro, over to you.
Socorro Heysen:
Well, first of all it was not the Central Bank, it was the supervisory agency, the Superintendency of
Banks. Let me say that we financial regulators are very reluctant to use regulatory forbearance. And for
good reasons, because regulatory forbearance comes with a degree of capacity, which in turn can affect
market discipline and encourage more haphazard.
Socorro Heysen:
But having said this, there is a time for some regulatory forbearance. I think this is it. This is it because in
this period of high uncertainty and market volatility, it is very difficult for institutions and supervisors to
determine the value of loans. It is not possible to assess what proportion of this shock is temporary,
what proportion of it is permanent? And in time financial markets are likely to recover part of the value
lost. Some of the capital flows will be re-established, with some limitations, as Vincent mentioned, and
some companies will recover. Many companies will recover and some of them with fiscal support and
measures.
Socorro Heysen:
So it is important to give time for the fiscal measures to kick in. So, for a time, we're not going to be able
to know what the new normal is. And therefore, at this point in my view some degree of forbearance
should be expected from the authorities in the short term. And this should be limited, controlled,
temporary, and well coordinated with other financial and economic authorities.
Socorro Heysen:
The statement that we measured had to do with not declaring a moratorium of debts, that's not what
we did. What we did was to allow financial institutions to refinance their debts, their clients' debts, in
two different fashions. Either on an individual one-to-one basis, or a massive group basis and continue
to accrue interest and maintain the classification. This is not a mandatory order from the
Superintendents, it is just an allowance that would facilitate banks to make decisions, not considering
the short term regulatory impact. Of course, if after this there is some long term impacts then other
types of measures have to be taken. So this is a matter of [inaudible 00:32:57].
Babak Abbaszadeh:
Thank you for that. That is a difficult decision for sure. Vincent, I think this question is probably better
addressed to you. A viewer is asking, do you see any permanent changes to the financial system as a
result of COVID-19? If yes, what are some of the changes that you foresee?
Vincent Reinhart:
So, I think there most likely will be permanent changes because this is a very big shock. As I said earlier,
at the other end of this governments will have a lot more debt and they will be at pains to finance that
debt. They will resort to, a phrase my wife uses a lot, "financial repression." Using regulatory powers to
keep interest rates on their ample amount of debt as low as possible. That's a permanent feature.
Vincent Reinhart:
We will probably also be somewhat more leery of algorithmic trading because part of what's happened
over the past few weeks is that model based trading hasn't worked particularly well. And in that
environment we're back to people speaking to people making markets. That learning process is not
usually forgotten all that quickly. It will be forgotten. It usually is.
Vincent Reinhart:
I think thirdly, our relationship with the Central Bank has been changed permanently. There was a
ratchet up in what the FED was willing to do in terms of outright purchases in 2008 and 2009 with
quantitative easing. There's been a further ratcheting up in terms of the types of assets the Federal
Reserve will acquire, and the counter parties the Federal Reserve will deal with. And the reality is when
a policy institution takes one step forward it's extremely difficult to go back. The FED has set a
precedent. Ben Bernanke set a precedent. Jay Powell has set a new precedent. The FED is going to be
more interventionist, more active in a lot of credit markets, not just government securities, but credit
across the board.
Babak Abbaszadeh:
Thank you very much for that. Something that we need to think about. In fact, we're going to do some
further followup with you on that question later on.
Babak Abbaszadeh:
Socorro for you, this question speaks to the anxiety of the pensioners, probably those who are about to
retire now or collecting retirement. So the question is as follows. "In light of the downturn in the global
markets and the investment loses resulting from COVID-19 pandemic, what are your thoughts on
government bailouts to the retirement funds in the form of payouts to their retiree members at their
values prior to the downturn of the market?" And then the questioner asks further on, "The retirement
funds will then repay the government at the point the markets return to normal and investment returns
are back to pre-COVID-19 levels." What are your general thoughts on that?
Socorro Heysen:
Well, in my experience the financial profitability of pension funds has to be looked at in the long term.
And it is very difficult to look at the value of the pension funds at one point of time and expect it to be
okay in a situation like this. In our particular case there have been prior crisis like the 2008, 2009 crisis,
in which the value of pension funds suffered an important reduction. Also, during the trade discussions
between China and the US there was an impact. And they have always recovered.
Socorro Heysen:
So I think that first, in our case, it is important that people do not make quick decisions and realize losses
at a time like this. Second, regarding the possibility of government bailouts, this is not a policy that we
are considering at this point. I think that the government should also wait to see what is the new
normal, what is going to happen. And policies will develop in time, if needed. But at this point I would
not do anything like that.
Babak Abbaszadeh:
Thank you for that. And turning back to you, Vincent, this questioner asks, "We hear about the impact
the government's response is having on the real economy, particularly small business and employees.
They are on the front lines and hardest hit by the measures designed to spread the spread of the virus.
How close are we, however, to large financial institutions beginning to fail, and we all remember 2008,
for example, due to unrecoverable loans and defaults? Are financial institutions beginning to plan how
to manage such losses including how to work with lenders with a longer term view?"
Vincent Reinhart:
They must be or they should be. It's easy to understand why small businesses, particularly in service
areas, are facing enormous constraints, especially because they probably don't have that many
resources to smooth over even a short lived disruption. But there are a lot of large businesses that are
under diversified. An airline company being the classic example. All they do is fly planes and if travel is
disrupted then their entire business model is at risk. The same is true for many parts of the hospitality
industry, gaming, hotels.
Vincent Reinhart:
So there are a lot of large businesses that are definitely facing some constraints. In that environment
they will have trouble with repayment. The first option, obviously, is reprofiling a delay in interest
payments.
Vincent Reinhart:
We've been emphasizing the companies and industries most directly affected by the disruptions from
the mitigation efforts, but remember also that commodity prices have fallen because an important
cartel couldn't manage supply given the big weakness in demand, i.e. the Saudis and Russia are at odds
and oil prices are trading in the low $20 a barrel. That has been a severe blow to the US shale oil
industry. And if oil prices stay as low as they are now for the remainder of the year, we would expect to
see a considerable number of bankruptcies. There is another example of an industry that is not
diversified.
Vincent Reinhart:
And there are also banks in those areas that aren't diversified. They do a lot of their loan book to oil and
gas exploration activities. So yes, there is going to be financial distress. It's going to be at the small level,
the medium sized level and it's now going to be affecting banks.
Babak Abbaszadeh:
Thank you. And Socorro for you, the question is, "Given the rise in cyber risk and AML, anti-money
laundering encounter financing and terrorism concerns, I guess as we move more and more to the
online environment, how do these can risks be minimized by regulators, supervisors, national
authorities, given the move to telecommuting and working remotely?" So it's a pretty astute concern.
Socorro Heysen:
In this particular moment if regulators and financial institutions have not done their homework there
are very limited tools to address issues like this. I think we have to rely on prior arrangements that have
been put in place for situations, not this particular situation, but something like this. And supervise
those prior arrangements and hope that they are going to work.
Babak Abbaszadeh:
That's good. To the point. Vincent, this questioner is kind of futuristic. I guess this question falls in the
ranks of a crisis is a horrible thing to waste. It says, "Do you think this situation is going to change the
business model of some financial institutions? Is this an opportunity or threat in the long term? How do
you see the landscape changing?"
Vincent Reinhart:
So, it matters. There will be, in any big shock, there'll be winners and losers. The winners are those who
are more technologically adept, who rely more on linking employees and customers by internet, that
don't need a physical presence, and can roll out more activity and get more revenue relatively quickly.
The fact that Amazon is out there trying to hire 125,000 extra people tell you that there's an
opportunity. The fact that Walmart is hiring 100,000 people tells you that there are also opportunities
amidst what is a considerable hardship.
Vincent Reinhart:
It probably also means there'll be more concentration. Go back to the oil and gas exploration industry. It
will be harder for the small and medium sized firms the longer low oil prices persist because their main
asset is in the ground and that's what they use as collateral. So you'd expect some consolidation in that
industry. So, it probably argues whether or not you like that trend for bigness, for technology and for
lack of physical presence and more digital ones.
Babak Abbaszadeh:
Okay. Thank you. And Socorro for you, you're also the supervisor regulator of the insurance sector, so I
think this question's appropriate for you. And unlike the other parts of the financial sector, insurance is
the protection. We need it. I hope that we never use it, but nevertheless it's important. So the
questioner asks, "What do you advise insurance regulators and supervisors to do in order to reduce the
effect on insurance companies and brokers in these difficult times?"
Socorro Heysen:
Oh, God. That's a difficult one. Well, I think the companies are going to have to try to preserve liquidity
and try to support their clients the best they can in these circumstances, giving some allowance for
some delays in payments of premium and things like that.
Babak Abbaszadeh:
Thank you for that. Vincent, for you, this is a retrospective question. I think we have touched parts of it
but it's always good to come back and try to elaborate more. "So, this outbreak has revived my memory
of the 2008 global financial crisis." I think it's revived many of our memories. "I think by this time most
central banks have already implemented some monetary policies through to avoid implementation lags,
but the effects may take months or years to materialize. Which short term measures may help, because
I think this will take a few months?" And now you've seen what the FED and others have done. But, have
all, I guess, the bullets been fired or is there other things that still can be done that are relevant?
Vincent Reinhart:
Well, a lesson in central banking is you never run out of stuff to do because you can just do what you've
already done in larger size or across more markets. So don't count the FED out. I would separate Central
Bank action into two parts.
Vincent Reinhart:
There are those aspects of policies and facilities to improve market functioning and there are those that
are designed to provide macroeconomic impetus. Macroeconomic impetus only works to lag and you
probably think in the current circumstances, the Federal Reserve ability to boost the economy is pretty
limited. Interest rates were already low before this. Another 25 basis points on the ten year treasury
yield isn't even being reflected in mortgage rates. And besides, if you are sheltered in place at home
another 25 basis points isn't going to change your behavior whatsoever.
Vincent Reinhart:
So it's not abut the macro economy, really it's only fiscal policy that can give an immediate lift if we can
get through the policy implementation lags there, i.e. Congress doing something. The first set of what
the Federal Reserve did was to support market functioning. Essentially, if you believe this is a V, that
we're in the downward slope portion, as economic activity contracts and people get more risk averse,
but you believe there's an upward slope to it, then you also believe that assets sold right now are done
at fire sale prices. That they will recover in value. What you don't want is financial institutions, investors,
to sell in a panic into a fire sale, have losses which then impair their business models and their ability to
function.
Vincent Reinhart:
So what the Federal Reserve is doing across asset class, across groups of investors, basically saying, don't
sell your asset, borrow from us at a preferred rate with a generous haircut on the value of those assets.
And so that avoids fire sales, avoids the losses, avoids the nonlinear events that make financial crises
have a permanent effect on macro economic activity.
Babak Abbaszadeh:
Thank you. And you know what, we're overrun with a lot of questions. We're not going to be able to get
to all the questions. But we do promise the questions we're getting will be, one way or another,
addressed either through the next webinar or through various work and publications that we do.
Babak Abbaszadeh:
So Socorro, I'm going to pose the very last question to you. It's an interesting one because I know that
you and your colleagues who weathered the global financial crisis, and you in Latin America are no
stranger to crisis in the region, have always been working with stress testing. We, at the Toronto Centre
have done a lot of work on crisis preparedness.
Babak Abbaszadeh:
So the questioner is asking, and then but the question is this pandemic. It comes all of a sudden and our
WHO speaker last week said this is the invisible enemy. And we're all beginning to see how, we're slow
walking into a depression if we're not careful, forget about a recession. So the question is, "Is there a
financial tool available which can be used by financial supervisors and regulators to anticipate and stress
test the impact of a shock like COVID-19?" And I guess the questioner is asking perhaps in the future. Is
there something, now that we learned about this, that can help prepare us for maybe another pandemic
or something or one of those unknown unknowns again in the future?
Socorro Heysen:
With the trading models, the supervisory models and the bank models regarding, and stress testing
models, cannot capture very well this event. It has a lot of complexities. Maybe a long time in the future
with the uses of bigger databases and access to other things, we may be able to do something like that.
But at this current time, all the stress testing models and the parameters are probably not too relevant.
So what we are having to rely on is more expert judgment at this time. Prior experience in dealing with
financial issues and crisis, I think it is more valuable at this point than a specific model.
Babak Abbaszadeh:
Thank you. So at this point I want to thank both you and our global audience. Our speakers, you really
kicked ass. This was a very, very interesting and informative session. Not glossy like those TV programs
that we see, not sensationalized, but really good information. Thank you for your frankness. This was a
difficult conversation. And almost every one of us right now is in one form or another in a lockdown
having this conversation.
Babak Abbaszadeh:
Toronto Centre will bring another few of these sessions forward on pandemics and financial stability.
Please be on the lookout for them. We look forward to working with you. And also, our own office,
just to let you know, in the province of Ontario, we are supposed to close the physical office at the end
of the day today. We will continue working on the virtual mode but this is the reality for everyone. And
I wish everybody a very healthy present and future. And thanks again and we will be in touch with you.
Good bye. Thanks.