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

Author

Listed:
  • Valencia Fabián

    (International Monetary Fund, 700 19th street, Washington DC, 20431-0001, USA)

  • Varghese Richard

    (International Monetary Fund, Washington DC, USA)

  • Yao Weijia

    (International Monetary Fund, 1900 Pennsylvania Ave NW, Washington DC, 20431, USA)

  • Yépez Juan F.

    (International Monetary Fund, Washington DC, USA)

Abstract

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 amplification of the shock through tighter financial conditions. Using an intraday event study, this paper examines how stock prices – a key driver of financial conditions – reacted to regulatory easing announcements in a sample of 18 advanced economies and 8 emerging markets. It finds that regulatory easing announcements contributed to looser financial conditions but effects varied across sectors and tools. News about regulatory easing led to lower valuations for financial sector stocks, mainly in jurisdictions with relatively lower capital buffers. These results stand in stark contrast with valuations of non-financial sector stocks, which increased in response to regulatory relief announcements, particularly in industries that are more dependent on bank financing. The effects also differed across tools. 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.

Suggested Citation

  • Valencia Fabián & Varghese Richard & Yao Weijia & Yépez Juan F., 2022. "Handle with Care: Regulatory Easing in Times of COVID-19," The B.E. Journal of Macroeconomics, De Gruyter, vol. 22(1), pages 363-396, January.
    • Handle: RePEc:bpj:bejmac:v:22:y:2022:i:1:p:363-396:n:9
    DOI: 10.1515/bejm-2020-0270
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    More about this item

    Keywords

    stock prices; policy announcements; financial conditions; capital; liquidity; COVID-19;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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