24/06/2020

Coronavirus Pandemic and Financial Market Regulation: Where Are We Now?

The crisis caused by the coronavirus has brought about swift changes to financial regulation. Solvency buffers for banks have been temporarily reduced so that banks can continue providing credit to their customers. Supervisory authorities have called on banks to be flexible, for example, in the form of general deferments of payments and amortisations.

A great deal of attention has also been focused on the stability of the financial system. In exchange for looser regulations, banks have followed recommendations to refrain from or delay the payment of dividends.

The supervisory powers of the authorities have also been expanded. One concrete example of this is a temporary tightening of the reporting threshold for short positions of listed shares from 0.2% to 0.1%. This tighter reporting requirement has currently been extended to mid-September.

Authorities have also sought to lighten the administrative burden of companies. For example, non-essential reporting periods have been extended. The European Securities and Markets Authority has recommended allowing the publication of financial statements and interim reports to be delayed beyond statutory time limits, and a corresponding amendment is in the works for the Finnish Limited Liability Companies Act.

Issuers Playing a Waiting Game

States and public actors have been on the bond markets gathering debt capital to finance their response to the pandemic and recovery measures. Companies have also gotten back in on this market. Now the focus is shifting to regulation of offering securities—above all to the brand-new prospectus regulation.

In particular, new provisions have made it easier for small and mid-sized companies and companies that are already listed to raise funds. Indeed, we have already seen the first rights issues.

However, one speed bump could be the poor first-half results and uncertain prospects of some listed companies caused by the emergency. Companies have to issue a working capital statement in prospectuses, in other words, they have to assess whether their assets are sufficient for the next twelve months, including in the worst-case scenario. This could prove challenging in the prevailing market conditions.

Lessons of the Financial Crisis?

In the aftermath of the financial crisis, financial regulation geared up for the next crisis. Regulatory developments focused on strengthening banks and their operations as well as on reinforcing market infrastructure and central securities depositories.

However, the old adage that generals always prepare to fight the last war still holds true. On the other hand, the focal point of the coronavirus crisis is not in the financial system itself—at least not yet.

Looking to the Future

In the financial sector as elsewhere, a great deal now depends on how long the crisis will last and when the economy will pick up again. The measures that have been taken so far have been focused on supervised institutions, such as banks, and on ensuring the continuity of their operations.

If the situation were to escalate to a full-blown financial market crisis, the Emergency Powers Act would provide the authorities in Finland with extensive authority to regulate the markets. Some of the more powerful tools available would be an obligation to call in overseas payment instruments, regulation of interest and restrictions on withdrawing deposits. Fortunately, this does not seem likely, particularly given that the government recently ceased applying the Emergency Powers Act. At the moment, it looks like the only concrete regulatory action will be a temporary 10% interest rate cap on consumer credit.

It is interesting to note that the Emergency Powers Act is currently undergoing reform, particularly with respect to the financial markets. The lessons of the pandemic will no doubt now be applied to this reform work.