Handle with Care: Regulatory Easing in Times of COVID-19

By Fabian Valencia, Richard Varghese, Weijia Yao, Juan Yepez

February 26, 2021

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Format: Chicago

Fabian Valencia, Richard Varghese, Weijia Yao, and Juan Yepez. Handle with Care: Regulatory Easing in Times of COVID-19, (USA: International Monetary Fund, 2021) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The policy response to the COVID-19 shock included regulatory easing across many jurisdictions to facilitate the flow of credit to the economy and mitigate a further ampli-fication of the shock through tighter financial conditions. Using an intraday event study,this paper examines how stock prices—a key driver in financial conditions—reacted to regulatory easing announcements in a sample of 18 advanced economies and 8 emerging markets. The paper finds that overall, regulatory easing announcements contributed to looser financial conditions, but effects varied across sectors and tools. Financial regulatory easing led to lower valuations for financial sector stocks, and higher valuations for non-financial sector stocks, particularly for industries that are more dependent on bank financing. Furthermore, valuations declined and financial conditions tightened following announcements related to easier bank capital regulation while equity valuation rose and financial conditions loosened after those about liquidity regulation. Effects from non-regulatory financial measures appear to be generally more muted.

Subject: Asset prices, Capital adequacy requirements, Financial sector, Stock markets, Stocks

Keywords: Announcement dummy, Capital, COVID-19., Equity price, Financial conditions, Liquidity, Liquidity regulation easing, Market reaction, Policy announcements, Regulation announcement, Stock prices, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/049
Stock No:

WPIEA2021049
ISBN:

9781513570631
ISSN:

1018-5941

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