[Conversations on...] The regulatory response to COVID-19: Successes and failures

  • Davide CASTELLANI, University of Bergamo
  • Babak ABBASZADEH, Toronto Leadership Centre


Davide CASTELLANI opened the session by stressing the need to close the gap between academics and practice in financial inclusion. In that sense, he referred to the e-MFP Action Group ‘From Research to Practice’, which is conducting research on the risks, challenges and opportunities of the COVID-19 crisis.

Castellani welcomed Babak ABBASZADEH, from Toronto Leadership Centre (‘Toronto Centre’), to share his insights on the impact of the COVID-19 crisis on the financial value chain. Toronto Centre promotes financial stability and financial inclusion, by providing high-quality capacity building programmes for financial sector regulators and ‘supervisors’. The Centre also developed a ‘guide to supervision’ during the COVID-19 pandemic.

Castellani first asked Abbaszadeh to describe how the COVID-19 crisis is different from the financial crisis in 2008/2009, and why responses from supervisors should differ. Abbaszadeh thanked Castellani for his question, and also thanked the European Microfinance Platform for organising such an important event, indicating that Toronto Centre is pleased to be a member of MFP. He then pointed out that, while in 2008 the financial crisis originated in the financial sector due to bad actors and inadequate corporate governance, the current crisis started as a health crisis but the financial sector has become part of the solution. It is key that supervisors adapt to working in these stressful conditions, so that once the health part of the crisis has been resolved, the financial sector can help rebuild the economy.

Castellani then asked for Abbaszadeh’s insights about the key priorities of supervisors at the beginning of this crisis and to share what worked well. Abbaszadeh stressed the operational challenges and risks faced by supervisors, due to the crisis itself and the lockdowns that followed. The pandemic led to credit risks, and he noted that there is even a potential for longer-term credit quality deterioration. Abbaszadeh also explained that supervisors struggled to activate their business continuity planning (BCP), as the situation could not be predicted. To that end, Toronto Centre coached supervisors on how to update their BCPs to better manage uncertainties. He emphasised that supervisors are showing unprecedented forbearance and flexibility to make allowance for operational constraints.

After discussing the key challenges caused by the COVID-19 pandemic, Castellani considered how the crisis has also led to opportunities to expand financial inclusion, by increasing digital payments and services. He asked for Abbaszadeh’s perspective how supervisors can support this digitalisation process, and the possible risks involved.

Abbaszadeh agreed that COVID-19 has expedited the adoption of digitisation, accelerating the proliferation of financial services providers entering the market. This has been critical to help the poor, particularly women, to gain access to formal financial services. However, this transition has increased risks, and is forcing all stakeholders, including supervisors, to improve their capacity to confront cyber risk and fraud. If unaddressed, this can have an immediate adverse effect on financial inclusion, thus decreasing the willingness and ability of financial institutions to provide financial products and services to certain parts of the population. Microfinance providers are already under a great deal of stress to reach the unbanked, and digitisation can only add to this stress. He emphasised that supervisors need to be part of the solution, to assess the risks involved, and help digitalisation move forward and support this fragile ecosystem.

Finally, Castellani asked Abbaszadeh to share the main strategies that supervisors followed during the second wave of the pandemic. Abbaszadeh pointed to the guide that Toronto Centre has developed to support supervisors’ capacity building in order to better navigate the new normal.

As there are still many uncertainties, supervisors need to remain open minded, continually update their BCPs, and plan for ‘new normal’ scenarios that reflect the impact of the crisis on the firms they supervise, and the broader market they operate in. Abbaszadeh closed the session by reminding the audience that this pandemic has also led to other opportunities; it has for instance expanded our awareness and attention for climate change, which he equated to a ‘slow moving pandemic’, and it has accelerated the technology trend.