Featured Product

    BIS on Role of Capital and Liquidity Buffers in Easing COVID Crisis

    April 24, 2020

    BIS published a short note or bulletin that explores the conditions under which the release of prudential buffers might help address the shock caused by the COVID-19 pandemic. The note first assesses the impact of the economic fallout from the crisis and the related policy measures on banks. It then reviews the design and usability of prudential buffers, before moving on to discuss how the relaxation of such buffers can support bank credit. Thus far, the prudential authorities have sought to support the flow of credit to firms, households, and governments, most notably by relaxing banks’ constraints on the use of liquidity and capital buffers.

    The note further highlights that for banks to continue playing a positive role in the supply of funding during the recovery, they should maintain usable buffers for a long period, as losses from a severe recession will take time to materialize. Bank counterparties, market participants, and the public need to remain convinced that  buffers in the banking systems will help them weather economic stress. If past experience is any guide, buffers will be needed for quite some time. However, no matter how aggressive, the release of available buffers is unlikely to suffice on its own to compensate fully for the recession-induced erosion of capital.

    For example, the CCyB put in place by BCBS jurisdictions before the COVID-19 crisis was set no higher than 2.5% of risk-weighted assets, with the CCyB of most jurisdictions being well below that level. Even tripling this amount by tapping into other buffers—while keeping some resources unused—would be only just enough to absorb the losses estimated in central bank stress tests. In recent versions of those exercises, recession-induced capital erosion was calculated to rise to 4.0% to 7.5% of risk-weighted assets (US, UK, and EU). Given that the impending global recession is likely to match or exceed the most adverse scenarios embedded in these past exercises, capital erosion may be much larger, even if governments intervene to support banks (for example, with guarantees).

    A buffer release will be most effective if included within a general strategy for managing the evolution of the pandemic’s economic impact with a portfolio of tools. Lessons from the past indicate that this strategy should have a medium-term horizon and combine transparency, effective market discipline, and preservation of intermediation capacity. It should help to avoid a financial crisis that will worsen the macroeconomic problem. Reading through this lens the messages from successful resolution of past banking crises, the restoration of credit flows to the real economy will be short-lived if banks become weighed down with bad assets and no buffers. Furthermore, government guarantee schemes should require banks to keep “skin in the game,” thus both protecting the solvency of the public sector and leveraging the ability of lenders to discriminate between good and bad credit. Preserving monetary and fiscal space is key, as the resilience of banks is likely to depend for a long time on a combination of buffers and non-prudential policies.

     

    Related Link: Bulletin

     

    Keywords: International, Banking, COVID-19, Bulletin, Macro-Prudential Policy, Capital Buffers, LCR, CCyB, Procyclicality, Regulatory Capital, Liquidity Risk, BIS

    Featured Experts
    Related Articles
    News

    EU Amends CRD4 and CRD5 as Part of Capital Markets Recovery Package

    EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.

    February 26, 2021 WebPage Regulatory News
    News

    EU Committee Recommends Systemic Risk Buffer of 4.5% in Norway

    The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.

    February 25, 2021 WebPage Regulatory News
    News

    PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks

    In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.

    February 25, 2021 WebPage Regulatory News
    News

    FSB Sets Out Work Priorities for 2021

    In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.

    February 25, 2021 WebPage Regulatory News
    News

    EU Publishes Corrigendum to Revised Capital Requirements Regulation

    EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).

    February 25, 2021 WebPage Regulatory News
    News

    ESAs Issue Statement on Application of Sustainability Disclosures Rule

    ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).

    February 25, 2021 WebPage Regulatory News
    News

    EC Consults on Crisis Management and Deposit Insurance Frameworks

    EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.

    February 25, 2021 WebPage Regulatory News
    News

    HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs

    HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.

    February 24, 2021 WebPage Regulatory News
    News

    EBA Proposes Standards for Supervisory Cooperation Under IFD

    EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.

    February 24, 2021 WebPage Regulatory News
    News

    BoE Addresses Banks in Scope of First Resolvability Assessment

    BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.

    February 24, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6629