Market Support Programs: COVID-19 Crisis

This paper is an analysis of important considerations for policymakers seeking to establish a market support program (MSP). Our main purpose is to assist policymakers who have already made the decision to use an MSP in designing the most effective program possible. Our insights derive from 23 case studies the Yale Program on Financial Stability produced and existing literature on the topic. By the onset of the Global Financial Crisis (GFC), market-based finance and traditional banking systems were significantly intertwined, and the panic in market-based finance threatened to spread quickly to both traditional banks and the real economy. In response, authorities in several advanced economies rolled out MSPs to ease the stress in wholesale-funding markets. In an earlier study, we surveyed 19 of these GFC-era programs along with two pre-GFC programs of similar design. The GFC programs were just a prelude, however, as central banks established or revived a variety of MSPs during the early months of the COVID-19 crisis. Many countries in both advanced and emerging markets acted quickly to improve liquidity and restore confidence in critical funding markets, as well as restart the flow of credit to households and businesses. In our review of these cases, we identified four major themes: (1) speed is important in the acute phase; (2) clear communication is a valuable policy tool in the acute phase, as announcement effects can be powerful; (3) combining MSPs with backup fiscal support can be a valuable tool; and (4) the use of a special purpose vehicle to house and manage the assets obtained through the program from the markets can be beneficial.