COVID-19 and political answers: early evidence in banks and fintech stocks
Australia’s major banking and fintech sectors were strengthened by early macroeconomic responses from the authorities to the challenges of COVID-19, new research shows.
Financial experts from Flinders University and Griffith University have looked back at the economic lessons learned during the first year of the country’s response to the COVID-19 pandemic and found that immediate action taken by the Federal Government and the Reserve Bank of Australia in early to mid-2020 had a stabilizing effect on the domestic banking and capital markets sector.
“The political response to the pandemic is an important opportunity to evaluate Australia’s economic response to a crisis caused by factors beyond its control,” said Dr Jak Kakhkharov, of Flinders University’s College of Business, Government and Law.
“The response from fintech stocks was more sensitive and in many cases in contrast to changes in the government’s emergency measures, COVID-19 news and monetary policy announcements, compared to banks.
“The results of this study support a strong emphasis on macroeconomic measures as the best stabilizing tool for managing the banking sector and the capital market in times of such crises in Australia.”
The study examined the impact of news related to COVID-19, monetary policy interventions, containment measures and the lifting of restrictions on Australian bank and fintech exchange rates.
Overall, bank and fintech exchange rates were more affected by the government’s macroeconomic announcements and the phasing out of containment measures than by monetary policy interventions in the early stages of the crisis.
While banks and fintech stocks were included in a sharp fall in the All Ordinaries index in March 2020, fintech stocks also experienced a sharp decline in February and March 2020 before staging a remarkable rise from these lows (see graph, attached).
Monetary policy interventions resulted in lower banking and fintech rates in the first phase of the COVID-19 pandemic.
The stock prices of smaller, often more volatile fintech stocks – operating in network security, mobile transactions, data analytics, blockchain, peer-to-peer, robo-advertising and Internet of Things (IoT) sectors – reacted differently to the crisis, proving more sensitive to the rapid series of monetary interventions.
Banks play a key role in the Australian financial system, holding almost 60% of financial institutions’ assets.
“This study suggests a need for more emphasis on macroeconomic policy interventions in Australia to stabilize this equity sector when dealing with future crises caused by external factors,” the researchers conclude.
Macroeconomic measures used include closure of non-essential businesses, Australian government guarantee for SME loans, JobKeeper Payment program, other assistance / restrictions on businesses.
Monetary policy interventions include cash rate adjustments, decisions to leave the cash rate unchanged, a program for quantitative easing and a forward financing facility for the banking system, with special support for credit to small and medium-sized enterprises.
Researchers propose further analysis of the long-term effects of policy responses introduced since 2020 to better address future responses, including the pros and cons of government revenue support measures and additional restrictions imposed to limit the spread of the virus, and the economic efforts to maintain large equity sectors on the way for investors and financial stability.
“The pandemic engulfed all economies and triggered complementary response from federal and monetary authorities, from economic restrictions and easing, temporary closures, quantitative easing and interest rate cuts and fiscal backwardness,” said Dr. Kakhkharov.
“The political responses of governments and central banks around the world to the financial market turmoil caused by the pandemic continue to support economies and markets in the months – and possibly years – to come.”
The article – COVID-19 and policy responses: Early evidence in banks and FinTech stocks (2022) by Jakhongir Kakhkharova and Robert J Bianchi – has been published in Pacific-Basin Finance Journal (Elsevier) DOI: 10.1016 / j.pacfin.2022.101815.
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