P2.T10.21.4. FSB Review of March 2020 Market Turmoil

Nicole Seaman

Director of FRM Operations
Staff member
Learning objectives: Identify the key market developments that took place during the March 2020 Covid-19 market turmoil, conditions that were prevalent, and their effects on the financial markets and its participants ... Describe the public-sector policy responses to restore financial market functioning during the Covid-19 market turmoil. Describe the lessons learned from the March 2020 Covid-19 market turmoil.


21.4.1. In their November 2020 report (Holistic Review of the March Market Turmoil), the Financial Stability Board (FBS) begins the story of COVID-19 with its emerging public awareness. While the "19" in COVID-19 signifies 2019, their origin story begins in early 2020 and divides into four periods: The Prelude; Flight to safety; Dash for cash; and Easing of market stress. In regard to this timeline, which of the following statements is TRUE?

a. Financial markets noticed COVID four months before the World Health Organization (WHO)
b. The second and third sub-periods combined (Flight to safety, starting at the stock market's peak, plus Dash for Cash) lasted less than six weeks
c. During the Dash for Cash, equity prices increased as margin cash flows were invested, but government bond prices increased even more rapidly
d. During the Dash for Cash, the US Dollar depreciated against major currencies, but then subsequently reversed itself and appreciated during the Easing of market stress

21.4.2. In contrast to the global financial crisis (GFC) of 2007-08, the COVID shock of 2019-20 originated outside the financial system. According to the Financial Stability Board (FSB), in the intervening decade, there were key structural changes in the global financial system; e.g., FSB writes that "the COVID-19 shock hit a global financial system that has fundamentally changed over the past decade. A number of factors – including regulatory reforms and market-driven adjustments in the aftermath of the global financial crisis, technological changes, developments in US dollar funding, and the growing role and evolution of non-bank financial intermediation – have affected financial resilience, intermediation patterns, and market functioning."(†)

In regard to these key structural changes, between the CFC and COVID, each of the following statements is true EXCEPT which is false?

a. Large banks were more leveraged with less capital and liquidity
b. Interconnectedness greatly increased and took new forms in some areas
c. Over-the-counter (OTC) derivatives reform generally replaced a complex, opaque web of ties with simpler, more transparent links
d. The asset share of non-bank financial institutions (NBFIs) grew considerably and their importance for the real economy increased

21.4.3. In addition to a devastating human toll, the external COVID-19 shock tested the global financial system's resilience. According to the Financial Stability Board(†) (FSB), despite a public sector policy response that was "speedy, sizable and sweeping," there are lessons to be learned and policy implications. In regard to these lessons and/or implications, which of the following statements is TRUE?

a. Although policy intervention had good intentions, they failed to stabilize markets
b. Central banks did succeed in fixing the majority of the underlying vulnerabilities
c. Open-ended funds that invested in illiquid assets, via offering daily redemptions, amplified liquidity stress
d. Initial margins for cleared derivatives, sized as a percentage of price, dropped suddenly because prices declined

Answers here:

(†) https://www.fsb.org/wp-content/uploads/P130721.pdf
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