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Public debt levels have skyrocketed globally due to the increase in fiscal expenditure needed for public measures to fight the economic damage caused by the pandemic, and by the effects of the slump in economic activity.
Credit to the private sector slowed down due to lower demand. The business and consumer portfolios contracted, while the housing portfolio reduced its dynamism. Financing to the public sector accelerated significantly.
The crisis caused by COVID-19 is showing its first impacts on the banking sector. Our analysis assesses the impact on the sector of seven factors and its trends: monetary policy, digitalization, regulation, economic growth, new entrants, competitive landscape and government support.
November 18, 2020
US | Nonbank financial intermediation, financial sector stability, and policy implications
Nonbank financial intermediation represents a large share of the U.S. financial sector. In times of crisis, it has been supported by the primary banking regulator - the Federal Reserve. In the absence of changes in oversight, this could lead to increased moral hazard and financial instability over the long run.
Agencies' sovereign ratings and sovereign spreads in the CDS markets have remained relatively stable over the past year despite the current pandemic crisis and the large fiscal and economic activity deterioration, mainly due to the unprecedented support from fiscal and monetary policies
In August the credit and deposits of the banking system exhibited more clearly the consequences of the economic recession. However, the stress test carried out by the Stability of the Financial System Board, underlined that the banking sector has liquidity and solvency conditions to withstand adverse economic scenarios.
Against this background, we expect now the ECB to announce a bold package by December, which would include another PEPP expansion, recalibration of liquidity provisions, and modification to the tiering system
We expect a 13% drop in 2020s GDP. Although activity is slightly improving, high-frequency data is showing a sluggish recovery for 2H20. In 2021, we expect activity to grow by 5.5%. A successful debt negotiation should open a window to carry out structural reforms that lead the country to a sustainable growth path.