Board of Governors of the Federal Reserve System

For nearly all industries, occupations, demographic groups, and locations, employment was substantially lower in May than in February. While job loss has been pervasive, some groups have experienced more severe employment declines than others, particularly workers with lower earnings and the socioeconomic groups that are disproportionately represented among low-wage jobs; employment declines have also been larger in some states than in others. Although disparities in labor market outcomes across groups often widen during recessions, certain factors unique to this episode—in particular, the social-distancing measures taken by households, businesses, and governments to limit in-person interactions—have contributed to the recent divergence.

Because jobs differ in the degree to which they involve personal contact and physical proximity, in whether they provide an "essential function," and in whether their business operations can be conducted remotely, social-distancing measures have had disparate consequences across industries and, in turn, on particular types of workers who tend to work in heavily affected industries. For example, the net proportion of jobs lost since February has been greater in industries such as accommodation and food services (where social-distancing regulations have severely affected many businesses and where workers are frequently unable to work from home) and smaller in industries such as professional and business services and financial activities (where workers may be less affected by social distancing and are generally more able to conduct work from home).¹ In keeping with this pattern, states that rely heavily on tourism—such as Hawaii and Nevada—saw exceptionally large increases in unemployment through April (the most recent month for which state unemployment rate data are available).

Net job loss since February thus far has been concentrated in lower-wage industries, suggesting that employment declines have been disproportionately large among lower-paid workers who may be less able to financially weather an extended period of unemployment. Indeed, estimates of employment declines based on a worker's previous wage (using data from the payroll provider ADP), shown in figure A, also indicate this disproportionate pattern of job loss. From February to mid-April, employment fell substantially more for workers who were previously earning wages in the bottom fourth of wage earners, compared with other workers. Despite somewhat more rapid job growth for lower-wage earners in subsequent weeks, employment for lower-wage earners remains roughly 35 percent lower than in February, compared with 5 to 15 percent lower employment for higher-wage earners. These differences are also consistent with results from a recent survey conducted by the Federal Reserve Board that indicated that among households with an annual income of $40,000 or less, nearly 40 percent of individuals who were employed in February experienced job loss in March or early April, compared with 20 percent of the population overall.²

Figure B illustrates that the decline in employment (as a fraction of the population) has also been especially large for people aged 16 to 24 compared with older workers, for people without a bachelor's degree compared with those with at least a bachelor's degree, and for Hispanics compared with other races and ethnicities. In addition, employment rates have dropped somewhat more for women than for men, and for Asians and African Americans compared with whites. In general, the groups with the larger employment declines are most commonly employed in the industries that have experienced the greatest net employment declines thus far, such as accommodation, food service, and retail trade; these demographic groups are also less likely to report being able to work from home.

In the months ahead, labor market prospects for the unemployed and underemployed—both overall and for particularly hard-hit groups of workers—will largely depend on the course of the COVID-19 outbreak itself and on actions taken to halt its spread. Recent job losses differ from those of previous recessions not only in the suddenness and severity with which they occurred, but also in the unusually high share of workers who expect them to be temporary.³ Research has shown that workers who return to their previous employers after a temporary layoff tend to earn wages similar to what they were making previously, whereas laid-off workers who do not return to their previous employer experience a longer-lasting decline in earnings.⁴ If public health conditions improve quickly so that social-distancing measures can be further relaxed and consumers become more willing to engage in a wider range of commercial activities, workers' expectations of being recalled may prove true, and many recent job losses may turn out to be temporary layoffs from which workers can quickly recover. However, if economic activity remains weak for a prolonged period, businesses that had intended to reopen at full capacity may instead be compelled to shutter completely or to resume operations at a diminished scale, turning many temporary layoffs into permanent job losses. Perhaps reflecting this possibility , the number of unemployed workers reporting that they had permanently separated from their previous employer rose by roughly 300,000 between April and May, even as the total number of unemployed persons began to decline. As lower-paid workers are disproportionately employed by small businesses—which typically have fewer financial resources than larger firms—they may be at heightened risk of seeing their former employers shut down and hence experiencing the scarring effects of permanent separations.⁵

In response to the immense health and economic consequences of the COVID-19 pandemic, federal lawmakers have enacted a variety of measures. These measures are expected to raise government outlays and reduce tax revenues—the sum of which we refer to as fiscal support—by nearly $2-1/2 trillion over 10 years, of which about $2 trillion is expected in the current fiscal year, according to the Congressional Budget Office (CBO) (figure A, row 5). The legislation also included $454 billion for the Department of the Treasury to fund lending facilities established by the Federal Reserve and $46 billion to provide loans to the airline industry.¹ Consistent with the historically large economic consequences resulting from the COVID-19 pandemic, the amount of fiscal support that has been enacted constitutes the fastest and largest fiscal response to any postwar economic downturn.

A. Fiscal support in response to COVID-19, by legislation

Figure B breaks down the estimated fiscal support for fiscal year 2020 (figure A, column 1) into four broad categories: (1) direct aid to households, (2) loans or grants to small businesses, (3) other aid to businesses, and (4) government purchases of goods and services or grants to state and local governments.

The rest of this discussion provides a brief overview of the main components of the four stimulus bills, focusing on the CBO's estimate of fiscal support (increased outlays minus reduced tax revenues) for fiscal 2020, organized by the four categories assigned in the figure.

Direct Aid to Households: $740 billion

The largest component of income support is roughly $290 billion in one-time payments to households. These stimulus checks provide households with a one-time refundable tax credit of $1,200 per adult and $500 per child 16 and under, with a phaseout at incomes between $75,000 and $100,000 for individuals and between $150,000 and $200,000 for couples. By the end of May, according to the Treasury Department, nearly all of the stimulus checks had been disbursed. The second major piece of household income support is $230 billion in expanded unemployment insurance (UI) benefits. UI benefits were increased by $600 per week through the end of July; eligibility was expanded through December for "gig" workers, the self-employed, and those who are unable to work as a result of the COVID-19 outbreak; and benefit durations were extended by 13 weeks through December. According to the CBO, around $70 billion in the more generous weekly benefits had been paid through the end of May. The legislation also provides student loan and mortgage relief, suspending loan payments and interest accrual on federal student loans until the end of September and reducing or suspending mortgage payments for mortgages backed by government-sponsored enterprises.² Another component of the legislation provides federally mandated paid sick leave for workers at employers with fewer than 500 employees. The cost of the sick leave is rebated to employers through refundable payroll tax credits, which are expected to total about $90 billion in fiscal 2020. Employees are entitled to up to two weeks of paid leave equal to normal earnings for employees or family members who are directly affected by COVID-19 or COVID-19-related closures; additionally, employees are entitled to 10 weeks of paid leave at two-thirds normal pay for those caring for a child whose school or daycare is closed. In addition, about $90 billion in tax relief was provided to households in fiscal 2020, primarily through expanding the deductibility of certain business losses from individual tax liabilities.

Loans and Grants to Small Businesses: $760 billion

The Paycheck Protection Program provides about $670 billion in support to businesses with fewer than 500 employees through loans of up to 250 percent of monthly payroll costs before the crisis (subject to a cap of $10 million). These loans will be forgiven if employment and compensation are maintained relative to a pre-crisis level. In addition, small businesses are supported by about $90 billion in Small Business Administration (SBA) Economic Injury Disaster Loans and by six-month loan payment deferrals for new and existing SBA borrowers.

Other Aid to Businesses: $420 billion

Businesses are aided by several provisions that reduce tax revenues in fiscal 2020, with the largest reduction coming from delayed payment of employer-side payroll taxes until 2021 and 2022, which is expected to reduce tax payments by $210 billion in fiscal 2020 but mostly be made up in subsequent years. An additional roughly $90 billion reduction in fiscal 2020 tax liability results from modifications of the treatment of net operating losses and interest expenses for corporations. The legislation also provides nearly $50 billion in payroll tax relief for businesses significantly affected by COVID-19 shutdowns in order to retain employees. Aside from tax relief, about $20 billion in loans and grants are expected to go to passenger and cargo air carriers and related contractors to support payroll expenses for aviation workers affected by the pandemic. In addition, about $50 billion in funds are expected to go to hospitals to support health-care-related expenses or provide relief for lost revenues. Finally, while they do not show up in the CBO's estimates of fiscal support, the legislation provided up to $454 billion for the Treasury Department to fund lending facilities established by the Federal Reserve to offer loans to businesses as well as state and local governments and provided up to $46 billion to offer loans to the airline industry.

Direct Government Purchases and Aid to State and Local Governments: $260 billion

The largest part of this aid category consists of about $150 billion in relief funding to state and local governments for expenses related to dealing with the COVID-19 pandemic. State governments will also receive an extra $30 billion through a temporary increase in the share of Medicaid expenditures that the federal government covers. In addition, the Federal Emergency Management Agency is expected to spend $50 billion in disaster relief funds to provide assistance to individuals and organizations affected by the COVID-19 crisis.

Small businesses employ nearly half of U.S. private-sector workers, play key roles in local communities, and provide income to millions of business owners. The COVID-19 pandemic poses acute risks to the survival of many small businesses. Widespread failure of small businesses would create economic insecurity for millions of workers and business owners, slow down the economic recovery, and alter the economic landscape of local communities. The Congress, the Federal Reserve, and other federal agencies are making aggressive efforts to support small businesses.

More than 99 percent of U.S. firms have fewer than 500 employees, and almost 90 percent have fewer than 20 employees. Altogether, businesses with fewer than 500 employees account for almost half of private-sector jobs.¹ Small businesses and small nonprofit organizations are particularly prevalent in service industries and include examples such as car dealers, restaurants, barber shops, medical offices, legal offices, home repair contractors, and religious organizations. These businesses and organizations are part of the economic and social landscape of local communities and neighborhoods. Small businesses are also prevalent in manufacturing supply chain industries.² Moreover, the businesses that spur innovation, contribute to nationwide job and productivity growth, and turn into large household names typically start out as small businesses.³

Small businesses are particularly vulnerable to social distancing for two main reasons. First, small businesses are prevalent in sectors that have seen especially large declines in revenue due to social distancing; small businesses make up about 60 percent of employment in the "leisure and hospitality" sector and about 85 percent of employment in the "other services" sector (which includes assorted neighborhood fixtures like churches and beauty salons). Second, small firms tend to be more financially constrained than larger firms. For example, bank account data suggest that roughly half of small businesses entered the COVID-19 crisis with cash reserves sufficient for fewer than 15 days of operations without revenue.⁴ Moreover, even under normal circumstances, many small firms face financial challenges and lack access to liquid financial markets, relying instead on bank loans, credit cards, and the personal resources of owners.⁵

A wide variety of data reveal an alarming picture of small business health during the COVID-19 crisis. Surveys of small businesses suggest that pessimism about business viability is prevalent.⁶ The majority of small businesses have seen revenue losses, and half of small businesses do not expect to return to their usual level of operations within the next six months.⁷

Employment declines have been deeper among small businesses than among larger businesses (figure A).⁸ Moreover, the share of total job losses accounted for by small businesses stopping paycheck issuance entirely (that is, going inactive) is substantial (light blue areas in figure A). Data from Homebase, a provider of scheduling and time sheet services for small local businesses, show that between 30 and 40 percent of establishments in sectors deeply affected by social distancing have gone inactive since February 15.⁹ Data from Womply, a provider of credit card transaction processing services, suggest that spending at small restaurants was down 80 percent (versus a year earlier) by early April and was still down 50 percent in early June.¹⁰ Taken together, these data suggest considerable risk of failure for a large number of small businesses.

The inflow of new businesses (which are typically small businesses) also plummeted, as shown in figure B. The Census Bureau reports that, in late March, applications for new employer business tax identifiers were down more than 40 percent relative to a year earlier; the series has only gradually recovered and was still just below last year's pace as of late May. Business entry is a key contributor to job creation; with business exits and associated job destruction likely to be elevated during the COVID-19 episode, new firm creation is even more important than usual.¹¹

The Congress, the Federal Reserve, and other federal agencies have acted swiftly to help address the risk of widespread small business failure. As part of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), the Congress created the Paycheck Protection Program (PPP) to provide small businesses with funds to retain employees for roughly two months. The Federal Reserve is bolstering the effectiveness of the PPP through the Paycheck Protection Program Liquidity Facility, which extends credit to eligible financial institutions to finance PPP loans. About three-fourths of small businesses with employees have applied for PPP assistance, suggesting the program is extremely valuable and timely, and a large share of these applications have been approved; however, some industries may face an ongoing need after the program expires.¹²

The Federal Reserve is also supporting lending to small businesses through the Term Asset-Backed Securities Loan Facility, which lends to holders of, among others, securities backed by loans guaranteed by the Small Business Administration. In addition, the Federal Reserve has established the Main Street Lending Program (MSLP), which features a range of facilities designed to provide support to small and medium-sized firms.¹³

Small businesses make vital contributions to labor markets and their local communities, and a critical subset of small businesses are young, innovative firms with the potential to create many jobs and increase overall productivity. The nature of the economic recovery that follows the COVID 19 crisis will depend in part on the survival of small businesses. Small business failures not only destroy jobs, but also erase the productive knowledge within the firms, deplete the assets of business owners, alter the character of communities and neighborhoods, and, in some cases, deprive the country of innovations. The Federal Reserve will continue to monitor the conditions of small businesses and support this fundamental segment of the economy.

The COVID-19 pandemic has abruptly halted large swaths of economic activity and led to swift financial repercussions. Despite increased resilience from the financial and regulatory reforms adopted since 2008, financial system vulnerabilities—most notably those associated with liquidity and maturity transformation in the nonbank financial sector—have amplified some of the economic effects of the pandemic. Accordingly, financial-sector vulnerabilities are expected to be significant in the near term. This discussion reviews vulnerabilities in the U.S. financial system at the onset of the pandemic and describes some of the extraordinary measures taken by the Federal Reserve to mitigate the brunt of the shock.

At the onset of the pandemic, asset valuation pressures in the United States were elevated. Spreads, risk premiums, and implied volatility were at the low ends of their historical distributions among several large asset categories, including domestic equities and corporate bonds. Beginning in late February, expectations for global economic growth plummeted and uncertainty increased sharply, driving down risky asset prices and putting downward pressure on Treasury yields. Equity prices plunged as concern over the COVID-19 outbreak grew and volatility surged to extreme levels. Trading conditions became impaired across several markets, posing significant challenges to price discovery and increasing trading costs. Yields on corporate bonds over comparable-maturity Treasury securities widened to the highest levels since the Global Financial Crisis (GFC). Leveraged loan spreads also widened, especially for lower-rated loans. Since late March, however, investors' tolerance for risk increased somewhat following interventions by the Federal Reserve; subsequently, risky asset prices partially retraced their course and market functioning improved. While the data on real estate prices mostly predate the COVID-19 outbreak, commercial real estate markets, in particular, had elevated valuation pressures at the beginning of 2020, making them vulnerable to significant price declines stemming from the unfolding effects of the pandemic.

On the eve of the pandemic, vulnerabilities associated with total private-sector debt stood at a moderate level relative to their historical norms. However, this assessment masks differences across the business and household sectors. Household borrowing advanced more slowly than overall economic activity and remained heavily concentrated among borrowers with high credit scores. By contrast, business debt levels were high relative to either business assets or gross domestic product, with the riskiest firms accounting for most of the increase in debt in recent years. Against this backdrop, the COVID-19 outbreak poses severe risks to businesses and millions of households. For businesses, as economic activity continues to contract, the related reduction in earnings and additional debt needed to bridge the downturn will increase the debt burden and default risk. For households, the sudden and outsized increase in unemployment and sharp decline in family incomes may give rise to widespread delinquencies and defaults.

In the financial sector, banks, as of the fourth quarter of 2019, were well capitalized relative to historical levels, in part due to the regulatory reforms enacted after the GFC. To date, banks have been able to meet surging demand for draws on credit lines while also building loan loss reserves to absorb higher expected defaults. Leverage at broker-dealers changed little in the second half of 2019 and remained at historically low levels. However, in March, constraints on dealers' intermediation capacity, including internal risk-management practices and regulatory constraints on the bank holding companies under which many dealers operate, were cited as possible reasons for deteriorating liquidity in even usually liquid markets. Leverage at life insurance companies has reached post-2008 highs. Moreover, the capitalization of the life insurance sector is likely to deteriorate in coming quarters because of lower-than-expected asset valuations and lower long-term interest rates. Some measures suggest that hedge fund leverage continued to expand through the end of 2019. Higher leverage left hedge funds vulnerable to asset price declines and to the increase in market volatility accompanying the COVID-19 shock. The subsequent deleveraging by hedge funds likely contributed to market dislocations in February and March.

Funding markets proved less fragile than during the 2007–09 episode in the face of the COVID-19 outbreak and the associated financial market turmoil. The subdued reliance of large bank holding companies on short-term funding and their robust holdings of high-quality liquid assets have prevented any considerable stress in the banking sector. Nonetheless, significant strains emerged and emergency Federal Reserve actions were required to stabilize short-term funding markets. Recent growth in prime money market mutual funds (MMFs) and large holdings of corporate debt by other mutual funds increased the vulnerabilities in the financial system. These vulnerabilities produced considerable strains in March as asset prices fell and investors became more risk averse. Prime MMFs and bond mutual funds experienced significant outflows in March, leading to severe strains in markets funded by these institutions—notably, commercial paper (CP) and corporate bond markets. The tensions began to ease only after the Federal Reserve took several actions targeted at these markets, as will be discussed.

The outlook for the pandemic and economic activity is uncertain. In the near term, risks associated with the course of COVID-19 and its effects on the U.S. and global economies remain high. In addition, there is potential for stresses to interact with preexisting vulnerabilities stemming from financial system or fiscal weaknesses in Europe, China, and emerging market economies. In turn, these risks have the potential to interact with the vulnerabilities identified in this discussion and produce additional strains for the U.S. financial system.

Facilities to Support the Economy since the COVID-19 Outbreak

The Federal Reserve, with the approval of the Secretary of the Treasury, established new credit and liquidity facilities under section 13(3) of the Federal Reserve Act to alleviate severe dislocations that arose in a number of financial markets and to support the flow of credit to households and businesses.¹ These actions fall into two categories: stabilizing short-term funding markets and providing more direct support for the extension of credit across the economy.

As investors moved rapidly toward cash and the most liquid assets, an acute liquidity squeeze emerged in short-term funding markets in mid-March. In the CP market, funding dried up even for companies in good financial standing. At the same time, investors contributed to the stress by starting to pull away from some prime MMFs, which typically hold CP and other highly liquid, short-term debt instruments. In response, the Federal Reserve set up the Commercial Paper Funding Facility, for which the Treasury Department has provided $10 billion of credit protection. In addition, the Federal Reserve established the Money Market Mutual Fund Liquidity Facility (MMLF), for which the Treasury Department will provide up to $10 billion of credit protection. The Federal Reserve established a companion facility, the Primary Dealer Credit Facility, to provide loans against high-quality collateral to primary dealers that are critical intermediaries in short-term funding markets. The announcement of these facilities strongly affected the targeted markets. After an initial wave of borrowing from the facilities, market strains eased and the use of these facilities has abated.

To provide more direct support for credit across the economy, the Federal Reserve established a number of facilities in March and April. The Treasury's equity investments in many of these facilities were authorized by the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). Together, these facilities will support the flow of up to $2.6 trillion of credit to large employers, small and medium-sized businesses, households, and state and local governments. The Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF) were established to support employment and spending of large, investment-grade businesses. Following the announcement of the PMCCF and the SMCCF, spreads of both investment- and speculative-grade corporate bonds declined notably, and issuance of investment-grade corporate bonds strengthened. To support the longer-term, market-based financing that is critical to real economic activity, the Federal Reserve reestablished the Term Asset-Backed Securities Loan Facility to purchase securities backed by auto loans, equipment leases, credit card loans, and other lending. The Municipal Liquidity Facility was set up to help U.S. state and local governments manage cash flow pressures by providing credit secured through their short-term obligations. The Federal Reserve established the Main Street Lending Program to provide up to $600 billion in four-year loans for small and medium-sized businesses that were in good financial standing before the pandemic. Finally, the Paycheck Protection Program Liquidity Facility (PPPLF) was established to bolster the effectiveness of the Paycheck Protection Program (PPP) of the Small Business Administration. The CARES Act created the PPP program to provide loans that can help small businesses keep their workers on payrolls. The PPPLF extends credit to eligible financial institutions to finance PPP loans, taking the loans as collateral.

The Federal Reserve is deeply committed to transparency and recognizes that the need for transparency is heightened when it is called upon to use its emergency powers. Transparency helps promote the accountability of the Federal Reserve to the Congress and the public. Specifically, the Board of Governors will report substantial amounts of information on a monthly basis for the liquidity and lending facilities using CARES Act funding as well as for the PPPLF, including the names and details of participants in each facility; amounts borrowed and interest rate charged; and overall costs, revenues, and fees for each facility. For the few programs that are targeting financial market functioning, the Federal Reserve will provide a full accounting of transactions in these facilities. Real-time disclosure would risk stigmatizing participation in these facilities and undermining the Federal Reserve's ability to provide assurance that these systemically important markets will continue their critical function in times of severe market stress. The delay in disclosure will be no longer than necessary to ensure that participants do not hesitate to participate. While the facilities are operating, the Federal Reserve will disclose extensive and regular aggregate information on total borrowing, collateral and fees, and interest income.

Tools to Lessen Strains in Dollar Funding Markets

The Federal Reserve has taken actions to help maintain the flow of credit to U.S. households and businesses by reducing financial stresses abroad, which can spill over into U.S. credit markets. The Federal Reserve's dollar liquidity swap lines improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress. These swap lines provide U.S. dollars to a foreign central bank in exchange for the equivalent amount of funds in that central bank's currency based on the market exchange rate at the time of the transaction. The Federal Reserve and each participating foreign central bank agree to swap back the same quantities of their two currencies at a specified date in the future. During the week of March 15, 2020, the network of swap lines was expanded and enhanced by adding additional central bank counterparties, lowering the price on the lines, and increasing the frequency and maturity of dollar operations.

In addition to the swap line enhancements, on March 31, the Federal Reserve announced a new program to support dollar funding markets, the temporary FIMA (Foreign and International Monetary Authorities) Repo Facility. This facility should help support the smooth functioning of the U.S. Treasury market by providing a temporary source of U.S. dollars to a broad range of countries, many of which do not have swap line arrangements with the Federal Reserve. Under this facility, FIMA account holders can enter into overnight repurchase agreements (repos) with the Federal Reserve, temporarily exchanging U.S. Treasury securities they hold at the Federal Reserve for U.S. dollars. The repos are overnight but can be rolled over as needed. The facility reduces the need for central banks to sell their Treasury securities outright, thus helping to avoid disruptions to the Treasury market and upward pressure on yields. Since its inception, take-up at the facility has been modest.

Regulatory and Supervisory Actions to Support the Economy since the COVID-19 Outbreak

The Federal Reserve has also made several adjustments to its regulatory and supervisory regime to facilitate market functioning and reduce regulatory impediments to banks supporting households, businesses, and municipal customers affected by COVID-19. These actions fall into the following four categories:

1. acceleration of previously planned, permanent adjustments to certain regulatory requirements to address specific impediments to market functioning
2. provision of additional time for banking organizations to phase in new regulatory requirements
3. temporary relaxation of certain regulatory requirements or requirements imposing supervisory burden
4. supervisory statements encouraging banks to support those affected by COVID-19

The first category includes changing the definition of eligible retained income to ensure capital and total loss-absorbing capacity buffers function as intended; allowing early adoption of a new method for certain banking organizations to measure counterparty credit risk derivatives contracts; reducing reserve requirement ratios to zero; and amending Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenience transfers from the "savings deposit" definition. The second category includes allowing certain banking organizations additional time to delay the effects of the Current Expected Credit Losses accounting standard in their regulatory capital and extending the initial compliance with the Single-Counterparty Credit Limit rule by 18 months. The third category includes excluding Treasury securities and reserves from the supplementary leverage ratio denominator; modifying the liquidity and capital rules to allow banking organizations to neutralize the regulatory effects of participating in the PPPLF and MMLF programs; introducing a change to support the favorable treatment of term primary credit loans from the discount window under the liquidity rules; providing temporary waivers to banks for limits on transactions with nonbank affiliates that offer credit and intermediation; temporarily lowering the community bank leverage ratio to 8 percent; giving banks flexibility in the timing of regulatory reports; and granting mortgage servicers flexibility to work with struggling consumers affected by COVID-19. Finally, the fourth category includes encouraging banks to use their capital and liquidity buffers to work constructively with borrowers and to make short-term loan modifications on a good faith basis, as well as encouraging lenders to offer responsible small-dollar loans to consumers and small businesses and to support low- and moderate-income borrowers through loans and banking fee waivers.

Authorities in foreign economies have announced a wide array of fiscal, monetary, and regulatory measures to mitigate disruptions caused by the COVID-19 pandemic.

Many foreign governments have enacted sizable fiscal packages to address the sudden loss of income by firms and households, with a special focus on the most vulnerable groups, such as low-income individuals, the unemployed, and small and medium-sized enterprises. The size of the support is, on average, considerably larger in advanced foreign economies (AFEs) than in emerging market economies (EMEs), as many EME governments have more limited fiscal space.

The measures targeted at firms aim to keep them afloat in the near term, with the hope of preserving businesses until demand returns. Such measures include loans at favorable terms and loan guarantees; deferrals of taxes and social security contributions; tax breaks and cash transfers, especially for small and medium-sized enterprises; and targeted sectoral support. For households, the measures aim to provide income to those in need and alleviate payment difficulties. These policies include increased unemployment and pension payments, mortgage deferrals, accelerated transfer payments, and direct cash payments. In addition, several AFEs and some Asian emerging economies have adopted large direct wage subsidies to keep workers on firms' payrolls. Such measures may help limit dislocations in the labor markets of these countries by subsidizing a significant reduction in hours worked. The hope of these programs is that workers' continued attachment to their firms will preserve human capital and make it readily available to the firms during the recovery that follows the crisis.

Many central banks have reduced their policy rates (figure A)—often to or near their effective lower bounds—and have taken substantial actions to start or expand asset purchases and to support the flow of credit. Although central banks acted quickly to lower interest rates, some policymakers in the EMEs expressed concerns about intensifying capital outflows, while a few AFE central banks worried about the potential harm to banks' financial health.

Several AFE central banks have purchased government debt in response to the crisis. These purchases have been primarily aimed at restoring market functioning and providing liquidity, but the purchases have also eased financial conditions by lowering long-term yields. The Bank of England (BOE) restarted its purchases of gilts, and the Swedish Riksbank increased the pace of its existing program. The European Central Bank (ECB) and the Reserve Bank of New Zealand introduced and expanded asset purchase programs. The Reserve Bank of Australia (RBA) began bond purchases to target the three-year government bond yield at 0.25 percent, the same as its overnight rate. Some central banks, such as the Bank of Canada (BOC) and the RBA, have started purchases of provincial and state bonds to support liquidity in those markets. To ensure the smooth transmission of its monetary actions, the ECB has used its flexibility to weight its purchases more heavily toward bonds of euro-area member states that face higher yields.

Monetary authorities have also adopted policies to sustain the provision of credit to businesses and households during the pandemic. Central banks have purchased a variety of private assets, thus directly addressing distress in funding markets and helping ease financial conditions for firms. These assets include corporate bonds purchased by the BOE, ECB, and Bank of Japan (BOJ); commercial paper bought by the BOC, BOE, BOJ, and Riksbank; and exchange-traded funds and real estate investment trusts purchased by the BOJ. These actions have significantly expanded the balance sheets of major foreign central banks (figure B). Some central banks in EMEs have also begun purchasing private assets, with the central banks of Chile and Colombia buying bank bonds.

Several central banks have also activated funding-for-lending facilities to provide relatively inexpensive funding to banks as long as they maintain defined lending benchmarks, in some cases with extra incentives to lend to small and medium-sized enterprises. The BOE, BOJ, ECB, RBA, Riksbank, and Bank of Korea currently have such programs.

Regulators in a number of foreign economies have introduced various measures that provide relief for banks to help sustain their capacity to absorb pandemic-related losses while continuing to lend to the economy. These measures include temporarily easing capital requirements, such as the reduction—and, in some cases, elimination—of conservation and countercyclical capital buffers; deferring the implementation of new, stricter Basel capital requirements; temporarily easing liquidity requirements (for example, in France, Germany, and the United Kingdom); and giving banks and their supervisors more flexibility in dealing with nonperforming loans (for example, the ECB). In addition, some regulators have temporarily excluded central bank reserves and certain safe assets from the calculation of leverage exposures. Some foreign regulators are considering the reduction or even elimination of risk weights on new loans guaranteed by the government. Regulators also emphasize that banks should continue to apply sound underwriting standards and conduct solid capital and liquidity planning and robust risk management.