COVID-19: A Treasurer's Liquidity Management Action Plan

The outbreak of the new coronavirus 2019 (COVID-19) has led to increased volatility in global financial markets (including the biggest single intraday drop in the Dow Jones Industrial Average).

This fast-developing situation is almost certain to affect a broad range of industries due to reduced consumer demand, disruptions in supply chains, cutbacks in travel and entertainment, leisure activities, and more. Coupled with the oil price shock and fears of a global recession, COVID-19 has caused the Federal Reserve, the Bank of England, and the Bank of Canada to cut benchmark rates in an effort to temper the shock.

The depth and breadth of the coronavirus crisis is on an order not seen since post-financial crisis liquidity regulations were first implemented, and there is a high degree of uncertainty over how it will unfold. While COVID-19 could turn out to be just a temporary disruption (similar to the 1987 Black Monday crash or the fourth quarter 2018 market sell-off and credit spread widening), it could also be the beginning of sustained stress in markets (similar to 2007/2008), given that it will be months before vaccine clinical trials begin and the impact of monetary policy typically takes time to ripple through the economy. Plus, with global interest rates currently near rock bottom, the effects of additional rate cuts may be limited.

While banks have significantly improved their liquidity positions with the implementation of post-financial crisis regulation, treasurers need to reassess their risks and prepare for a large range of potential outcomes. Typical liquidity stress testing scenario development and liquidity risk driver identification and calibration would not have considered conditions that may develop under this COVID-19 scenario.