It’s mostly fiscal – The sharp contrast

After the devastating widespread and unexpected pandemic impacted on the financial institutions there was a necessary or a requirement for the policy reaction mainly to counteract the impact on all fronts like monetary, fiscal and prudential policies.  The corporate losses and SMEs ( small and medium-sized enterprises ) require the support that only Government can provide. Remember the joke about International Monetary Fund (IMF’s) acronym was also called as ( It’s mostly Fiscal ), it applies all the time. The support tools had to be mobilized including the micro and macro prudential policies.  All in all there was an impressive activism in the financial regulators. Encouraging forbearance and avoiding automaticity in NPLs ( non-performing loans )  accounting and provisions , allowing the use of capital and liquidity buffers, reducing the supervisory, operational and reporting burden, delaying the entry into force of more stringent requirements while bringing forward more lenient ones and  ensuring the continuity in the provision of critical functions were some of the measures taken to offset the impact of the pandemic. Guarantees for loans with better regulatory treatment were given to companies and individuals who were affected by the pandemic by the Government. To avoid the generation of a vicious contraction spiral that would entail a huge credit crunch that would further aggravate crisis , financial regulation received a radical reverse as it was very sensitive to the deterioration of the economy that a sudden downturn without the compensating measures will create. As a result of reforms there was a reinforcement of The pro cyclicality of financial regulation, which was identified as a key weakness at the time of the 2008 global financial crisis, after being solved apparently. This is seen in sharp contrast with the fiscal policy whereas the automatic stabilizers tend to have smoothen the impact of cyclical swings in the absence of discretionary policies. Clarifying upfront that the risk in cyclical and therefore the pro cyclicality would be inherent in the financial sector. Which was analyzed in literatures such as in Hyman Minsky’s financial-instability hypothesis for a long time now.  In order to prevent the automaticity in the financial regulation, it is important to consider which constrain binds in each cyclical situation that if it is either in financial regulation or market discipline. The markets tend to relax to the point of being myopic in the boom phase and this requires the authorities to be vigilantes.  To conclude based on the previous rules v/s discretion talks, the objective of making financial regulation less pro cyclical is proving elusive. The measures which have been taken have far more unclear effectiveness. With the problem of time restriction and the pressure of the markets always complicates the implementation of the policies. What seems advisable to Santiago Fernandez de Lis, the head of the Regulation , BBVA is that having a rule based approach in which the pro cyclicality of the market discipline is built together with the recognition  of their very own limited capacity to calibrate the cycle ex-ante. Also doing future research on the relationship between countercyclical capital buffers and dynamic provisions under expected-loss accounting is required.