What keeps you awake at night? As countries across the globe struggle to flatten the curve, COVIDd-19 has already affected more than 37 million people putting the resilience of the banking sector to test. What does this mean to the central banks of the world and regulated entities? How can they manage systemic risks effectively in the time of pandemic?

In the 2020 Webinar Series Central Banking Amidst COVID-19, launched by BSP Institute, the BSP and the International Monetary Fund – Singapore Training Institute (IMF-STI) discussed how central banking policy, operations, and programs are being addressed given the challenges brought about by the pandemic.

BSP Deputy Governor for the Corporate Services Sector, Maria Almasara CydTuaño–Amador, kicked-off the discussion by highlighting the importance of a bank’s resilience to systemic shocks and the stability of the banking system.

Mindaugas Leika, IMF Monetary and Capital Markets expert, provided an interesting comparison of the two (2) most recent crises that have shaken the banking industry: the Global Financial Crisis (GFC) of 2008 and the COVID-19 crisis.  GFC originated in the financial sector, while COVID-19 crisis started as a health issue was a shock direct to the economy due to lockdown affecting the flow of goods and services.

During the GFC, banking supervisors were able to identify exposures, introduce new capital and liquidity tools, and employ public communication tools as a precautionary measure to calm markets. While the COVID-19 crisis is unprecedented and losses seem to be dependent on vaccine availability.  Moreover, output loss and shocks to unemployment during the GFC was a result of over investment into housing and real estate markets, while output loss in the current crisis is bigger and more adverse due to lost supply of services, hotels, travel, and healthcare etc.

To support the recovery of the economy, policy responses available at the disposal of central banks include: a) support for real sector, including grants, subsidies, and direct payments to affected sectors; b) monetary policy responses, such as monetary easing and expansion of balance sheets, and c) regulatory responses in the form of release of capital and liquidity buffers.

Dr. Hoe Ee Khor, Chief Economist at ASEAN+3 Macroeconomic Research Office (AMRO), pointed out that ASEAN's systemic risks include sovereign debt and financial crisis due to the pandemic.  To mitigate the risks, policymakers need to manage the exit from the stimulus policies carefully to facilitate a smooth transition to the new normal. Hence, the region is projected to show a “V-shaped” fast recovery in 2021.

Other possibles are U, W, L shaped recoveries. There’s also the K shape where certain industries /companies thrive (healthcare, medical services) while others really suffer (travel, hotels, tourism etc.) true, even during the pandemic.

BSP Assistant Governor Dr. Johnny Noe Ravalo of the Office of Systemic Risk Management (OSRM) used available Philippine data to present the business linkages between industries and between the firms operating within those industries. Instead of the traditional approach of assessing GDP growth rates and prospects, he considered   business connections to map out the actual “network” among market stakeholders. He noted that there is quite a bit of “math and modelling” behind “network analysis” and provided visual representations to make his points. He referred to these linkages as “channels of risks” that can cause small shocks to work themselves through the network linkage-by-linkage, ultimately creating much larger risk effects which he calls “slow burn contagion”.

AG Ravalo said that COVID-19 is likely to affect the future preferences and risk behaviors of producers, consumers and financial market stakeholders. This is an important consideration as we think of the New Economy, where both the regulators and the public at large –have to factor in the consequences of and position for when all of the inter-linkages are accounted for. He compared this to our ongoing focus on the COVID-19 virus. We worry about our own health not knowing how it will affect our own self and the broader community.For one can be asymptomatic and can spread the virus, subsequently putting a strain on everyone else and the health infrastructure that must address the community’s needs in general. Slow-burn contagion, like COVID-19 is a systemic shock whose effects to the system is more than just the sum of the effects on each individual.  There is, as AG Ravalo says, a “hawa” effect.   

Effective risk management and risk culture are the key priorities, as the banking sector faces a broad spectrum of risks, including credit, market, liquidity, operational, systemic, business, and reputational risks. A crucial area too is cybersecurity, as cases of cyberattacks have multiplied a hundredfold amid the global pandemic.

Challenging times demand the best of us as individuals, leaders, and organizations. Hopefully we will emerge stronger and more resilient as we fight this virus and navigate this crisis together.  Stay safe!

Flor Gozon Tarriela is chairman of the Philippine National Bank and PNB Capital. She is a former Undersecretary of Finance and the first Filipina vice-president of Citibank N.A.  She is a trustee of FINEX Foundation, FINEX Academy and an Institute of Corporate Directors fellow.   [email protected]