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June 22, 2020 – Governments and regulators should set out guidelines to allow for creativity in encouraging investments, such as a “sandbox” where innovative approaches can be tested, according to a new C.D. Howe Institute working group report.

The C.D. Howe Institute Crisis Working Group on Monetary and Financial Measures argues such measures would increase the confidence of lenders and investors when engaging with businesses.

The group, co-chaired by David Dodge, former Governor of the Bank of Canada, and Mark Zelmer, former Deputy Superintendent, OSFI, also tackled issues such as the underwhelming uptake of certain support measures offered by governments, uncertainty on future policy responses to the pandemic, strategies to tap large savings pools among both institutional and retail investors, as well as principles guiding future government support.

The group of leading financial market experts and economists recommended:

  • On the issue of uncertainty, governments should provide a clear state-contingent roadmap for how they will react to the evolution of the pandemic from an integrated health and economic standpoint;
  • In addition, governments should provide clarity on the medium-run plan for a return to fiscal sustainability;
  • Governments and regulators should set guidelines for a sandbox that allows for experimentation between businesses looking for capital and lenders and investors looking to provide it. Equity and equity-like investment should be prioritized;
  • As part of these guidelines, policymakers should ensure rules and regulations do not impair domestic and foreign institutional investment;
  • They should also look for ways to tap into retail investor savings pools through, for example, collective investment schemes;
  • To the extent that credit programs continue, they should be guided by the following principles:
    • Any credit decisions on who to lend to should rest with the lender not the government;
    • Any facility should be a facility of last resort for borrowers, i.e., the incentive should exist for borrowers and lenders to negotiate on commercial terms first;
    • Any government support, be it through a guarantee or as a co-lender, should provide a return for taxpayer commensurate with the risk being taken by the government, plus provide incentives to encourage lenders to conduct proper and complete credit assessments and structure lending on proper commercial terms;
    • Programs should recognize that longer repayment terms may be appropriate for some borrowers but that longer terms for repayment should compensate the taxpayer for the associated additional risk;
    • The taxpayer, through the government, should rank on equal footing with other senior unsecured creditors in the creditor stack or should be compensated accordingly for supporting more subordinated exposures;
    • Government should consider the broad range of financial institutions that might appropriately have access to these facilities and make clear the rationale for including or excluding any type of institution for a particular type of facility; and
    • Government should make clear its plan for modifying programs over time related to objective indicators of economic conditions.

For more information, please contact: Jeremy Kronick, Associate Director, Research, C.D. Howe Institute; David Blackwood, Communications Officer, C.D. Howe Institute. Phone 416-873-6168; email dblackwood@cdhowe.org

Full Communiqué: CWGR_2020_0622.pdf