BankNotes Blog
The Three-Legged Stool: How Large Banks Have Supported the Economy During the Pandemic
05.24.21 | COVID-19 Response


The COVID pandemic created a global public health crisis that quickly morphed into an unprecedented economic shock that has negatively impacted businesses, households, and industries across the globe.  As economies have dealt with the pandemic’s fallout, large, internationally active banks have played an important role in helping businesses and households.  A new report released by the Financial Services Forum, the Institute of International Finance, and the International Swaps and Derivatives Association, The Role of Financial Markets and Institutions in Supporting the Global Economy During the COVID-19 Pandemic,” documents how large, internationally active banks have supported the economy through the channels of 1) extending credit early, quickly, and at scale to companies in need of financing, 2) underwriting debt and equity for public firms and governments seeking to raise funding from primary securities markets, and 3) supporting market liquidity to buttress primary securities markets and aid the risk-management needs of investors.  Together, and in concert with a variety of important official sector actions, large banks have strongly supported the global economy during the pandemic.  In this post, we provide a brief overview of some of the report’s key findings and conclusions.

The Calm Before the Storm: The State of Large Banks Pre-Pandemic 

Large banks, such as Financial Services Forum members, entered the pandemic with robust levels of capital and liquidity that have grown appreciably over the previous ten years.  As shown in Figure 1, from 2010 to 2020, Forum member capital grew by 42 percent while liquidity grew by 164 percent.  As a result, Forum members and other large banks were well-positioned to absorb and adjust to the initial economic fallout of the pandemic.  In this way, large banks played the role of a shock absorber, which helped other industries and people manage the abrupt and significant economic costs of the pandemic.  Moreover, while changes to the large bank regulatory regime were one important reason for the enhanced resiliency of large banks, it is also the case that large banks had made significant strides in their own risk, capital and liquidity management practices that served them well as the economy entered the pandemic.

The First Leg: Absorbing the Shock in the Immediate Aftermath - A Surge in Large Bank Lending

In the earliest stages of the pandemic, companies everywhere ran into acute funding needs as revenues plummeted and the costs of maintaining operations rose.  Companies immediately turned to bank lending to fill the gap between their needs and available resources.  Large banks responded by channeling large amounts of funding and liquidity to companies through bank lending - often through the drawdown of existing credit lines.  As shown in Figure 2 below, taken directly from the report, large bank lending rose sharply in the early stages of the pandemic. The finding that large banks were the fastest acting and most significant suppliers of credit in the early stages of the pandemic is supported by other research.  Specifically, economists at Boston College and the Federal Reserve Board studied lending activity in early 2020 and found that large banks with total assets in excess of $50 billion were the largest suppliers of credit during that period.

The Second Leg - the Primary Market Pivot: Large Banks Underwrite a Large Increase in Debt and Equity Issuance

At the onset of the pandemic, securities markets were racked by a bout of illiquidity that severely slowed the pace of issuance and made it difficult for companies and governments – especially municipalities – to raise funding through primary securities markets.  Following a number of important official sector programs that were enacted to re-start public securities markets, security issuance increased quickly.  Companies then used security market issuance to replace bank lending.  Large banks play a key role in intermediating primary securities markets by underwriting debt and equity.  As underwriters, large banks commit capital and liquidity to issuers so that they can issue securities into the market at a pre-determined price.  Underwriters then sell these securities to pension funds, mutual funds and other investors.  In so doing, large banks fill a fundamental role of connecting savers and borrowers in the economy.  As shown in Figure 3 below, taken directly from the report, global corporate bond issuance increased by roughly 66 percent over the course of 2020.  This funding then directly supported the operation of companies across the globe so that they could continue to keep their doors open, their employees paid, and produce the goods and services that the economy needed.

Finally, it is important to highlight that governments – both national and local - also benefitted from increased underwriting by large banks, which helped them to raise the funding needed to support a range of crucial government stimulus and public health programs during the pandemic.

The Third Leg – Maintaining Market Liquidity

The pandemic ushered in a period of significantly heightened uncertainty and risk that immediately increased demands by investors everywhere to hedge and re-evaluate their risks through securities and derivative markets.  Large banks act as significant market makers by taking on and deploying securities inventory in response to customer demands.  As an example, when risk rises, investors often desire to reduce their risk by selling some or part of their securities holdings.  In an environment in which “everyone is selling,” market makers need to be net security buyers because they can’t find enough ready buyers to offset the torrent of sell orders.  In this way, large bank market makers act as shock absorbers and help balance the market. Indeed, this very dynamic presented itself from the outset of the pandemic and large banks met client demands to sell by buying large amounts of securities and building their own security inventory.  As shown in Figure 4, taken directly from the report, in the case of corporate bonds, large bank dealers steadily built their inventory levels over the course of the pandemic.

Two things are worth noting about the inventory build depicted in Figure 4.  First, building inventory during a period of heightened risk means increasing the risk borne by market makers.  This increase in risk directly offsets the reduction in risk sought by investors selling their security holdings.  During the pandemic, market makers directly assumed risk that would otherwise have been borne by their clients and counterparties.  Second, these events did not occur in a vacuum.  Over this period, several official sector efforts were put in place that were aimed at supporting secondary market trading and helping large bank market makers to absorb increased trading demands.

Lessons Learned and Future Directions

More than a decade after the large bank regulatory system was first reconsidered, the economy was hit by a purely external or “exogenous” shock that is useful for examining whether the current large bank regulatory regime is achieving all of its stated goals.  The early evidence suggests that strengthened capital and liquidity were highly beneficial to the banking system and the economy at the onset of the crisis.  At the same time, the performance of the banking sector and financial markets also reveals that some aspects of the large bank regime may not have worked as intended by regulators.  In the report, we discuss a range of regulatory issues that deserve careful examination in light of the events of the pandemic.  Much of the report’s discussion is directly in line with statements made by government officials and standard-setting bodies such as the Financial Stability Board (FSB).  As just one example, we call attention to the concept of “capital buffers” that regulators designed to be drawn down during economic downturns.  The available evidence, research and statements by key policymakers suggest that these buffers may not have worked as initially intended by regulators and should be re-examined.  We believe that the congruence between the report’s statements and statements made by policymakers and official bodies such as the FSB augur well for a robust, open, and honest evaluation of the large bank regulatory regime.  We look forward to participating in that evaluation.


The pandemic has dealt a severe shock that has upended all of our lives.  As we have all struggled to cope with the new realities of the past 18 months, it is important to take a step back and consider how different parts of the economy have performed under this unprecedented stress.  Our new report, The Role of Financial Markets and Institutions in Supporting the Global Economy During the COVID-19 Pandemic, takes a data-based and analytical approach to assessing the role played by large, internationally active banks in responding to the pandemic.  Our findings are that large banks have been an important and constructive part of the global solution to this crisis.  At the same time, and importantly, large banks have not operated independently.  The large-scale efforts of governments have been paramount to our shared successes.  Our main point in this regard is that the role played by large banks has in many respects been complementary to official government actions.  As large banks have extended credit, underwritten securities, and enhanced market liquidity, the rest of the economy has been better able to meet the challenges presented by the pandemic.  As we move forward and continue to recover from the pandemic, large banks will undoubtedly continue to play a constructive role in concert with governments and other industries.     


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