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In retrospect: RBNZ’s support of financial market functioning at the onset of COVID-19

This Bulletin discusses our actions to support financial market functioning during the early months of the COVID-19 crisis.

Finn Robinson and Denham Watson


We combine financial market data with insights from interviewing market participants to: 

  • provide an outline of what drove dysfunction in key financial markets in New Zealand in March and April 2020 and
  • analyse the facilities and operations deployed by the Reserve Bank to address financial market dysfunction. 

The evidence presented in this Bulletin shows that our actions to support market functioning were timely and effective, particularly given the speed with which events unfolded. Our experience in 2020 provides valuable observations and next steps that will help to refine the design and deployment of facilities and operations to support market functioning. These are listed below.


Key observations and next steps

Key observations

  • The NZD/USD foreign exchange (FX) swap market may face periods of illiquidity when global crises trigger a sharp appreciation of the USD. The Reserve Bank's FX swaps are a powerful tool to provide NZD liquidity in these events.
  • The secondary market for New Zealand Government Bonds  remains vulnerable to illiquidity during periods of market stress due to limited intermediation capacity, few market markers, and the pro-cyclical impact of market risk limits. This extends to other secondary bond markets, for example Local Government Funding Agency and corporate bonds.
  • Earlier action by the Reserve Bank in the week of 16 March 2020 may have reduced the peak of the dysfunction seen in NZD financial markets. However, due to the global scale of the crisis at the time, material market dysfunction in New Zealand was unavoidable.
  • There is a powerful announcement effect from launching central bank facilities and operations to support financial market functioning. Stronger communication of some programmes, particularly the Bond Market Liquidity Support programme could have improved their effectiveness.
  • Some facilities and operations were kept in place for longer than was necessary to support market functioning. Facilities and operations deployed to support financial market functioning should have credible and well-communicated exit strategies.
  • Some facilities and operations did not directly address the source of dysfunction in the relevant financial markets. Promptly diagnosing the type of liquidity event markets are experiencing will help to determine whether the Reserve Bank should respond, what tools to deploy, and how long these tools should be kept in place.
  • Two-way communication between the Reserve Bank and market participants is important to support early identification of, and responses to, crises.
  • Having established a set of facilities and operations to support market functioning should support timelier action by the Reserve Bank. However, flexibility is essential since crises are often unique – hence the importance of a principles-based approach.

Next steps 

The Reserve Bank will:

  • determine and articulate principles for supporting financial market functioning and how it interprets its role as market maker of last resort.
  • evaluate its current toolkit of facilities and operations for liquidity provision, to determine its suitability in both business-as-usual liquidity management and crisis scenarios, with a view to simplification where possible (for example, where there are multiple similar facilities deployed to support the same goal).
  • investigate if the design of facilities and operations to support market functioning appropriately balances the associated costs and benefits (for example balancing an effective operation with moral hazard risks).

Why we did this research

Key NZD financial markets experienced severe illiquidity at the onset of the COVID-19 pandemic. We responded by deploying a range of facilities and operations to support market functioning. This research helps to understand the specific drivers of illiquidity in these markets, and the effectiveness the different facilities and operations deployed by the Reserve Bank.

The analysis in this Bulletin also supports the liquidity management framework review we are carrying out. As outlined in Silk (2023), this review will consider how we manage liquidity in financial markets during normal times and during a crisis. A number of central banks have undertaken, or are currently undertaking, similar reviews of their actions to support financial market functioning and of their business-as-usual liquidity management frameworks.

Read Karen Silk's speech - Liquidity: one word, three meanings (PDF, 902 KB)