Federal reserve building, Washington DC

Efforts by the world’s central banks to ensure that global financial markets continue to function, despite the fallout from the Covid-19 outbreak, provide banks with time and space to adjust to fast-changing conditions, says Fitch Ratings.

In a new report, the rating agency said that the sweeping actions taken by the U.S. Federal Reserve Board (in coordination with other key central banks) — which includes cutting interest rates, enabling banks to use their capital and liquidity buffers, and buying up Treasuries and mortgage-backed securities — should give the big U.S. banks and markets “more time and increased flexibility to adjust to the unfolding coronavirus pandemic.”

Fitch said that the scale and scope of the central banks’ actions reflect their determination to combat the effects of the pandemic on financial markets.

“The uncertainty around the impact of the coronavirus has unsettled the financial markets in general and the funding markets in particular,” Fitch said.

“The degree of uncertainty, along with scope of the economic impact, is causing investors to seek safe havens such as cash. This behavior is reflected in reduced investor appetite for corporate and term debt, along with corporate treasurers’ desire to have more cash on hand,” it noted.

Fitch said that the large U.S. banks have adequate capital and liquidity, but that “the Fed’s actions should provide banks with more options to continue supporting clients and the economy, including through more accommodative access to the Fed discount window.”

Historically, banks have been reluctant to use the Fed’s so-called discount window for fear of signalling financial instability.

Yet, Fitch said that “in light of market disruptions,” it would not view banks turning to the Fed’s discount window as a negative signal or as indicative of a weakness in liquidity.

It also noted that the eight largest U.S. banks have all promised to stop share buybacks, which is “prudent in light of the uncertainty and supportive of [tier 1] capital levels, with capital available to be used to lend during the economic slowdown caused by the coronavirus pandemic.”

“We expect other U.S. banks to follow suit as the impact to the U.S. and global economy continues to expand,” it said.