Expert Recommendations can Guide Policymakers in Preventing Financial Crisis on top of Health, Economic Crisis
Better banking policies are needed given the serious challenges financial systems will face from the economic impacts of the COVID-19 health crisis in Latin America and the Caribbean, a new working group report released today finds.
The report was co-chaired by the Center for Global Development (CGD) and the Inter-American Development Bank (IDB).
Sound Banks for Healthy Economies: Challenges for Policymakers in Latin America and the Caribbean in Times of Coronavirus outlines a series of challenges and details recommendations for regional policymakers, also relevant for other emerging markets worldwide.
“Families and firms alike are struggling during the ongoing pandemic, and they will need financing to both weather the crisis and come out on the other side with enough strength to survive and then build back. There is a strong sense that the longer COVID-19 rages on, the strain on financial systems will worsen. This is where averting systemic banking crises throughout the region becomes critical,” said Liliana Rojas-Suarez, director of the Latin America Initiative at CGD and co-author of the report.
“Many countries have allowed banks to restructure loans with no additional required provisioning and have implemented loan guarantee schemes,” said Andrew Powell, principal advisor in the IDB’s research department and co-author of the report. “While these policies have been constructive, they carry risks and alternative instruments should be considered.”
Some of the report’s other findings include the importance of maintaining central bank credibility and balance sheet strength, focusing on instruments to deal with solvency as well as liquidity problems, and harnessing new transfer programs to boost financial inclusion. An accompanying blog provides more information on some of these options.
The report concludes that Latin America and the Caribbean has a difficult path to navigate during and after the COVID-19 crisis. Good policies, as identified through the discussions of the expert working group that formed the basis of this report, will help minimize the economic hardship and allow banks to play a constructive, comprehensive role in the pandemic recovery phase throughout the region.
About the IDB
The Inter-American Development Bank is devoted to improving lives. Established in 1959, the IDB is a leading source of long-term financing for economic, social, and institutional development in Latin America and the Caribbean. The IDB also conducts cutting-edge research and provides policy advice, technical assistance, and training to public- and private-sector clients throughout the region.
The Center for Global Development is an independent, nonpartisan, nonprofit organization that works to reduce global poverty and improve lives through innovative economic research that drives better policy and practice by the world's top decision makers.