June 2020 - Presented at the OECD Committee on Financial Markets Meeting

1. THE IMPACT OF COVID-19 ON
THE FINANCIAL RESILIENCE
OF GLOBAL MARKETS
Surveillance by the OECD Committee on
Financial Markets
Directorate for Financial and Enterprise Affairs
June 2020

2. Committee on Financial Markets
• The overarching objective of the Committee on Financial Markets is to promote
efficient, open, stable and sound financial systems, based on high levels of
transparency, confidence, and integrity, so as to contribute to sustainable and
inclusive growth.
• The Committee’s core method to support this objective is through in-depth and
proactive surveillance of financial developments and analysis of their impact on
economic growth and stability.
• This presentation reflects the Committee’s current surveillance of global financial
markets and risk transmission mechanisms related to the economic and financial
consequences of Covid-19.
2

3. Main financial market developments and downside risks
3
• Short-term funding conditions have stabilized following major central bank
actions but corporate funding conditions remain strained for low quality
issuers.
• Unprecedented financial programs causing valuation concerns in a prolonged
weak economic environment.
• Falling bank equity valuations reflect concerns over asset quality with
expected losses eroding operating profits.
• Rising downside risks for EME sovereign and corporate debt and risk
aversion reflected in continued outflows from EM equity ETFs.

4. Major central bank actions contributed to lower yields, yet monetary
policy transmission is uneven across jurisdictions
4
• Increases in the size of major central banks’
balance sheets reflect implementation of asset
purchase programs and special facilities to
provide liquidity to markets and corporates.
• Declining sovereign yields in a numerous OECD
countries on reduced growth expectations.
• However, market participants suggest yields of
some affected countries are rising due in part to
risk aversion from implications of rising debt
levels.
Source: Refinitiv, OECD calculations.
4.2 4.2 4.2 5.3 6.7 7.0
5.2 5.2 5.2
5.7
5.9 6.1
5.3 5.3 5.4
5.6
5.8 5.8
0.6 0.6 0.6
0.6
0.7 0.8
0
5
10
15
20
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20
USD, tn
Selected major central banks total balance sheet
Federal Reserve European Central Bank System
Bank of Japan Bank of England
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20
%
Major advanced economies 10-year sovereign bond yield
United States Euro Area United Kingdom
Japan Spain Italy
Source: National central bank websites, OECD calculations.

5. Short-term funding conditions have stabilised
Note: USD Libor OIS is US Dollar 3-month forward Libor OIS spread. EURIBOR
OIS spread is the difference between 3-month Euribor and Eonia overnight rates.
Source: Refinitiv, OECD calculations. 5
• Normalisation of short-term bank funding
costs in the US have fallen considerably, while
the European funding markets remain low.
• Following financial policy actions, stress in non-
financial commercial paper, including lower
rated A2/P2, has eased considerably.
Source: Federal Reserve Bank of Saint Louis.
0
0.5
1
1.5
2
2.5
3
3.5
4
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20
%
US corporate funding cost
Secured overnight financing
Overnight AA financial commercial paper
Federal Funds target range (upper limit)
30-Day A2/P2 non-financial commercial paper
30-Day AA non-financial commercial paper
-20
0
20
40
60
80
100
120
140
160
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Basispoints
Bank fundingcost
USD LIBOR OIS spread EURIBOROIS spread

6. Unprecedented financial programs causing valuation concerns but
notable divergence between market segments
Source: Refinitiv, OECD calculations.
6
• Rise in price-to-earnings ratios toward pre-
crisis levels in most major advanced markets.
• Rising concerns on the sustainability of equity
price valuations amid downward revisions to
earnings forecasts.
• Resilient healthcare and technology sectors due
to stronger demand for healthcare services and
the benefits of e-commerce.
• Laggards include energy, retailers, industrials,
real estate and banks due to weak oil prices,
falling demand, deteriorating asset quality and
rental/mortgage payment deferrals.
Note: Equity price change expressed in percentage using Refinitiv
global sectoral equity benchmarks.
Source: Refinitiv, OECD calculations.
-40 -30 -20 -10 0 10
Energy
Banks
Real estate
Industrials
Basic materials
Utilities
Consumer staples
Consumer discretionary
Telecommunications
Healthcare
Technology
%
Equity price change since Januray 1st 2020 by sector
8
13
18
23
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Ratio
Price-to-earnings ratio of major equity benchmarks
United States Europe Japan United Kingdom China

7. Partial recovery in oil prices but challenges remain
7
• Partial recovery in oil prices mostly due to
supply cuts but demand still far below pre-
crisis levels.
• Remaining elevated volatility reflects
concerns over weak economic conditions that
may amplify risk to energy producers.
Note: S&P local currency long-term debt rating are used; or foreign current long-
term debt rating if previous not available.
Source: Refinitiv, OECD calculations.
• US energy companies subject the most to rating
downgrades, as credit market conditions for oil
producers remains stressed.
196
65%
39
13%
36
12%
31
10%
Rating downgrades and changes to negative outlook and
watch in the energy sector, since January 2020
United States
Europe
Other advanced
EMEs
Note: OVX is implied volatility of crude oil prices.
Source: Refinitiv, OECD calculations.
-150
-50
50
150
250
350
-50
-10
30
70
Jan-20 Feb-20 Mar-20 Apr-20 May-20
VolatilityindexUSD per barrel
Oil prices and implied volatility
Crude-oil brent WTI crude-oil OVX (RHS)

8. Contrast in US and European high-yield bond markets’ performance
Source: SIFMA.
9
• Recovery of US corporate high-yield bond
issuance in April following Federal Reserve
actions to support liquidity in the corporate
debt market.
• Subdued activity of European corporate high-
yield bond market, as credit spreads remain
elevated.
Source: AFME.
0
5
10
15
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20
EUR, bn
Europeannon-financialhigh-yield corporatebond
issuance
0
5
10
15
20
25
30
35
40
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20
USD, bn
US non-financial High-yield corporatebond issuance

9. • Leveraged loan spread widened sharply due to
the COVID-19 crisis but have since moderated.
• Spread narrowing appears in part due to
government support measures, though
uncertainty over operationalization remains.
10
Rising risks of leveraged issuers contributed to elevated spreads
and weaker issuance
• Leveraged loan issuance also declined during
the COVID-19 crisis as markets continue to
reflect concerns over credit quality of highly
leveraged companies.
Note: Spread is the difference between yield-to-maturity of S&P/LSTA U.S.
Leveraged Loan 100 Index and 3-month US Dollar LIBOR rates.
Source: Refinitiv, OECD calculations.
Source: OECD (2020) Structural Developments in Global
Financial Intermediation, Refinitiv, OECD calculations.
0
10
20
30
40
50
60
70
80
90
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
USD, bn
US non-financial corporates
leveraged loan monthly
issuance
0
5
10
15
20
25
30
35
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
USD, bn
Europeannon-financial
corporates leveraged loan
monthly issuance
Loans Revolving facilities
2
4
6
8
10
12
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20
% US leveraged loan spread

10. Depreciated REITs valuations due to negative impact of
shutdown, while securitized mortgage price levels have improved
11
• REITs valuations remain depreciated due to
rental deferrals/abatements and prolonged
uncertainty regarding the impact of the COVID-
19 in sectors (hotels, universities, offices,
infrastructure) REITs invest.
• Household an commercial mortgage-based
securities have regained much of their market
losses.
Note: Simple average year-to-date price change using data of listed commercial
REITs (cREITs) and residential REITs (mREITs) globally.
Source: Refinitiv, OECD calculations.
Source: Refinitiv, OECD calculations.
95
96
97
98
99
100
101
102
103
104
105
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Price change
(100=Jan-2020)
Bloomberg Barclays US Dollar RMBS and CMBS investment
funds
CMBS RMBS
-50
-40
-30
-20
-10
0
10
1-Jan-20 1-Feb-20 1-Mar-20 1-Apr-20 1-May-20
Year-to-dateprice
change (%)
Real investment trust price index
US cREITs US mREITs
Other advanced economies cREITs Other advanced economies mREITs

11. Different business lending standards for US and European banks
Note: Distressed ratio is calculated as the market value of S&P US HY
corporate bond distressed index divided by the market value of S&P broad US
HY corporate bond index.
Source: Refinitiv, OECD calculations.
12
• US banks tightened their lending standards to
businesses in 2020, amid a rise in the HY
corporate distressed bond ratio.
• European banks facing increasing borrowing
demand from corporates while slightly
tightening their lending standards.
• ECB liquidity support through extended eligible
collateral to the debt of companies downgraded
to high-yield during the Covid-19 outbreak.
Source: Refinitiv, OECD calculations.
-80
-60
-40
-20
0
20
40
60
80
100
%
Opinion survey on US bankslending practices to corporates
and high-yield defaulted bonds
US high-yield corporate bond distressed ratio
Net percentage of banks tightening standards for loans to firms
Net percentage of US banks reporting stronger demand for loans to firms
-60
-40
-20
0
20
40
60
80
%
Opinion survey on European bank lending practices to
corporates
Net percentage of European banks tightening standards for loans to firms
Net percentage of European banks reporting stronger demand for loans to
firms

12. Falling bank equity valuations reflect concerns over credit
conditions
Source: Refinitiv, OECD calculations.
13
• Falling bank equity valuations due to the sharp
rise of non-performing loans and expectations
for further deterioration.
• Deterioration of earnings expectations in all
major banking systems weighting on current
bank equity valuations.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Ratio
Major bankingsystems price-to-book value ratio
United States Japan France Italy
Spain Germany United Kingdom
Note: Percent change in 12-month forward EPS is calculated using Refinitiv
selected country bank equity benchmarks between beginning and end dates of
major crisis.
Source: Refinitiv, OECD calculations.
-120
-80
-40
0
Italy
Spain
France
UnitedStates
UnitedKingdom
Japan
Germany
% Change in 12-month bank forwardearning per share

13. Asset quality concerns remain elevated in many banking systems
with expected losses eroding operating profits
Source: Refinitiv, OECD calculations.
14
• Asset quality concerns remain elevated as some
individual banks in affected countries face a rise
in non-performing loans and decline in
earnings.
• Expected losses already account for a
substantial share of operating profits for many
banks in major banking markets.
0
50
100
150
200
250
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20
Basis points
Average bank CDS of major advanced banking markets
United Kingdom United States
Japan Italy
Spain France
Germany and Netherlands
0
50
100
150
200
CMA
FITB
KEY
RF
WFC
HSBA
MTB
USB
JPM
CFG
C
FRC
HBAN
BAC
SIVB
PBCT
CBKX
LLOY
ABN
SGE
KNF
CABK
DBKX
BSAB
UBI
SAN
RBS
DNB
STAN
CRDA
SWED
BP
UCG
INGA
RAI
SEA
BKT
ISP
BNP
BARC
MB
BWGP
NDAS
ERS
BBVA
SVK
SMFI
MITF
DBHI
SMTH
United States Europe Japan
%
Q1 2020 loan loss provisions to pre-provisionprofitfor
selected large banks in major banking markets
708 409
Banks are named using their ticker identifier. Pre-provision profit is
operating profit (including provision for loan losses).
Source: Refinitiv, OECD calculations.

14. Policy actions help mute the depreciation of major EME
currencies following the COVID-19 crisis
15
• Currency depreciation against the US Dollar in
major EMEs following COVID-19 shutdowns.
• Central banks in EMEs lowered their policy
rate consistently with major central banks’
actions to help ease financial conditions.
Note: A rise is a depreciation of the domestic currency against the US Dollar.
Source: Refinitiv, OECD calculations.
Source: Refinitiv, OECD calculations.
95
100
105
110
115
120
125
130
135
140
145
150
Jan-20 Feb-20 Mar-20 Apr-20 May-20
FX index
(100=Jan-2020)
Exchange rate of selected major emerging economies
Brazilian Real Mexican Peso Argentinian Peso
New Turkish Lira Russian Rouble Chinese Yuan
Indian Rupee Indonesian Rupiah Malaysian Ringgit
0
2
4
6
8
10
12
%
Centralbankpolicy rateof selectedmajoremerging
economies
December2019 April 2020
55 40

15. Rising downside risks for EME sovereign and corporate
debt
16
• Credit quality deterioration of EMEs sovereign
issuers caused by a greater share of debt being
denominated in foreign currency, which has
been affected by recent exchange rate
depreciations.
• EME sovereign and high-yield corporate bond
spreads have risen sharply and remain
elevated.
• Rising solvency risk in the context of a
weakening economic environment.
Source: Refinitiv, OECD calculations. Source: Refinitiv, OECD calculations.
200
400
600
800
1000
1200
1400
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Basispoints
EM corporate and sovereign option-adjusted spreads
Sovereign Corporate (high-yield)
0
2
4
6
8
10
12
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Numberof
countries
Sovereign issuer rating downgrades and changes to
negative outlok or watch
Advanced: Changes to negative outlook or watch
Advanced: Rating downgrades
EMEs: Changes to negative outlook or watch
EMEs: Rating downgrades

16. EME equity valuations under pressure with strong
outflows from ETFs
17
• Equity valuations negatively affected during the
COVID-crisis.
• Further earnings decline in airline and oil
sectors impacted by shutdowns.
• High levels of risk aversion reflected in
continued outflows from EM equity ETFs
while bond flows are muted.
Source: Refinitiv, ETFdb.com, OECD calculations.
65
70
75
80
85
90
95
100
105
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Price index
(100=Jan-2020)
Selected Top EM equity and bond ETFs
Invesco EM sovereign debt JPMorgan USD EM sovereign bond
iShares MSCI EM iShares EM corporate bond
Note: Percent change in 12-month forward EPS is calculated using Refinitiv
EMEs sectoral equity benchmarks between beginning and end dates of major
crisis.
Source: Refinitiv, OECD calculations.
-100
-80
-60
-40
-20
0
Emergingmarkets
Airline
Oilequityandservices
Industrials
Consumerdiscretionary
Healthcare
Basicmaterials
Realestate
Consumerstaples
Technology
%
Change in 12-month forwardearning per shareof EM
sectoral benchmarks

17. Questions for discussion
18
• To what extent have major rates, credit and equity markets stabilised
following unprecedented government responses to the initial market stress
due to the economic consequences of Covid-19?
• In light of the continued stress in some parts of the financial markets, how
will high-yield corporate debt in Advanced and Emerging Markets withstand
further deterioration in credit conditions, including elevated refinancing
rates and depressed operating earnings?
• What could be the next steps for monetary and fiscal policy-makers to
support economic recovery and sustainable economic growth in a context of
high sovereign and corporate debt and market fragilities? What steps should
be taken to further built bank resilience with potential rising losses and
detrimental effects on performance?

18. .
Supporting financial markets during the pandemic
Financial markets policy guidance on the
OECD COVID-19 Hub:
 Financial markets – financial fragilities and policy
recommendations to address financing needs
 Public debt management – increased borrowing needs and
market volatility
 Financial consumer protection – easing the burden on
households
 Supporting financial resilience of citizens – financial awareness
and literacy
 Insurance – coverage under pandemics
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