A fiscal support to households to combat the COVID-19 outbreak in the form of direct payments, tax rebates or payroll tax deductions and direct assistance and loan guarantees to virus-affected industries such as airlines could amount to $850 billion-$1.2 trillion, a report said.

The COVID-19 outbreak, and the public sector response to it, has kicked off panic-driven demand for precautionary cash balances, added the special report from UK investment bank and financial services organisation Barclays.

This has led to strains in a number of markets, including those for short-term funding, US Treasuries and agency mortgage-backed securities, according to the report.

The Fed’s provision of abundant liquidity, large-scale asset purchases, and willingness to provide term access to the discount window, among other items, should help unclog dealer balance sheets. The Fed is using its balance sheet to grow the financial sector’s capacity to intermediate.
   
“We believe there are additional measures that could be taken on the regulatory front that would easy the distribution of liquidity. The most important of these would be a loosening in capital requirements through the leverage ratio and a reduction in risk-weighted assets for household and business loans. The Fed took a step in this direction with the MMLF; more can be done,” Barclays said in the report.

“We also worry liquidity support is not enough. Solving the GFC required the Fed and public sector to take risk in the form of preferred capital injections into the banking sector and the Treasury’s placing Fannie Mae and Freddie Mac into conservatorship. Liquidity support was necessary, but public sector risk-taking proved necessary and sufficient.

“Again, the MMLF took an important step in this direction by eliminating recourse to the banks. We believe this is an important lens to evaluate future programs.

“One potential solution could be granting the Fed temporary emergency authority to purchase a wider array of municipal securities (currently, it can only purchase securities with six months remaining maturity). In addition, it could be granted emergency authority to purchase investment grade corporate debt and loans,” the bank explained in the report.

“Yet more may be needed. The banking sector could be used to aggregate losses, which can then be made whole by the public sector. This could come in the form of mass government-financed forbearance on credit cards, mortgages, and small business loans, among others, for the period of the economic lockdown; this would be facilitated by banks, but ultimately paid for by the government,” Barclays concluded. – TradeArabia News Service