Moreover, as such assessments necessarily contain a degree of uncertainty, policymakers need to continuously monitor how new regulations are actually affecting incentives in practice, and adapt them accordingly where unintended consequences appear. We have seen this, for example, with the Liquidity Coverage Ratio. Another example is securitisation. It is now widely acknowledged that regulatory initiatives aimed at preventing a replay of the sub-prime crisis may have indiscriminately affected all ABS, including simple and transparent structures that can play an important role for SME financing. In line with on-going work at the international level, this is now in the process of being addressed through the amendments to the Solvency II (for insurers) and Capital Requirements Directives (for banks), recently published by the Commission. As part of this agenda, we also need to ensure that regulations are mutually consistent. For example, a well-functioning SME ABS market requires banks that can market and trade securitised products. This depends in turn on their capacity and willingness to absorb temporary demand-supply imbalances. Thus, we should be careful to ensure that new regulations, for instance aimed at separating the banking and trading arms of universal banks, do not have negative consequences for market-making activities that are not justified by significant risks, in particular in less liquid markets. In all these ways – cyclical, legacy, regulatory – setting the right microeconomic incentives for the banking sector can have significant macroeconomic consequences. They are therefore areas where, if we want to sustainably repair the banking lending channel, the attention of policymakers is warranted.

With backing from the U.S. Treasury, the Federal Reserve established the commercial paper funding facility as a funding vehicle that can purchase new issuance of commercial paper from highly rated businesses and municipalities, and certain issuers that were downgraded after the virus shock. By providing assurances to issuers and investors that retiring commercial paper can be replaced with new issuance, the facility will promote confidence in the market and support the flow of credit to businesses and municipalities. Corporate Credit Facilities (CCFs) At the same time that short-term commercial paper markets were nearly frozen, so too were markets for longer-term corporate borrowing – at precisely the moment when companies most needed a financing buffer. Borrowing rates for investment-grade corporate issuers relative to Treasury securities increased by about 2.5 percentage points in the first half of March, while issuance for companies rated below investment grade came to a halt. In this context, the primary market corporate credit facility (PMCCF) was designed to provide funding for highly rated companies that need access to financing in order to maintain business operations during this period of dislocation. Again with backing from the U.S. Treasury, the Federal Reserve will create a funding vehicle to backstop eligible corporate borrowers for up to four years, at an interest rate that is better aligned with corporates’ underlying credit risk than was available through market-based financing during March.