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

Handle with Care: Regulatory Easing in Times of COVID-19
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Volume/Issue: Volume 2021 Issue 049
Publication date: February 2021
ISBN: 9781513570631
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Topics covered in this book

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Banks and Banking , Finance , Economics- Macroeconomics , Stock prices , policy announcements , financial conditions , capital , liquidity , COVID-19 , , WP , liquidity regulation easing , regulation announcement , announcement dummy , equity price , market reaction

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.