Featured Product

    FSI Examines Loan Guarantee Programs for Banks Amid COVID-19 Pandemic

    April 29, 2020

    FSI published a brief report analyzing the loan guarantee programs launched to support for bank lending to companies, including small and medium-size enterprises (SMEs), in response to the COVID-19 pandemic. The brief reviews key features of a sample of guarantee programs, illustrating approaches taken in response to a systemic crisis and highlighting the differences between these approaches. It also reviews the complementary measures and the key challenges that can affect the overall success of the guarantee programs.

    To provide liquidity to the economy, governments in several jurisdictions are offering guarantees on bank loans to non-financial companies. The design of such programs needs to strike a difficult balance between responding promptly to the pandemic and maintaining a sufficient level of prudence. Key features of a sample of programs (for example, target beneficiaries, coverage of the guarantee, loan terms, and length of the program) reflect this tension. The brief contains a table that takes stock of the key features of a sample of bank guarantee programs. Concerning eligibility, all programs in the sample require that companies be in good financial standing and have no non-performing loans as of a cut-off date just prior to the onset of the pandemic. The target beneficiaries vary in the sample, but in every country there is a program for SMEs and, in some countries, also for larger companies. Programs addressed to SMEs face lighter operational requirements and benefit from higher coverage ratios of the guarantee.

    Under the assumption that the COVID-19 pandemic can affect firms’ liquidity but not their viability, limits to both the lifespan of these programs and the duration of loans are to be expected. Finally, the intensity and speed of the crisis required a high level of flexibility in the design of the guarantee program, with some features becoming less stringent over time. Some jurisdictions, such as Hong Kong, Italy, Switzerland, and the United States, also increased the size of the program. 

    One of the conclusions is that loan guarantee programs can benefit from complementary measures that increase their appeal to banks and their customers. While in normal circumstances these measures may not be needed, pressure to implement the COVID-19 related guarantee programs rapidly and on a large scale has driven authorities to introduce such complementary measures. Incentives were created for the banks to join these programs by exploiting flexibility in existing prudential requirements, while central banks have often provided liquidity support.

    Such programs are, however, subject to operational challenges and fiscal capacity limits that can affect the overall success of the guarantee programs. Countries in better fiscal condition at the onset of the crisis can offer larger guarantee programs as a proportion of their economy, thus facilitating the recovery once the emergency is over. Moreover, as some of the guaranteed loans will inevitably fail to perform, public funds will have to be disbursed. Any doubt about a country’s fiscal capacity to absorb losses on guaranteed loans could damage the profitability or even the viability of banks, possibly engulfing them in a negative bank-sovereign loop

     

    Related Links

    Keywords: International, Banking, COVID-19, SME, Operational Risk, Guarantee Scheme, Credit Risk, Expected Credit Loss, Regulatory Capital, FSI, BIS

    Featured Experts
    Related Articles
    News

    BCBS Amends Guidelines on Sound Management of AML/CFT Risks

    BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).

    July 02, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Amendments to Swap Margin Rule

    US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.

    July 01, 2020 WebPage Regulatory News
    News

    PRA Letter Sets Expectations on Approach to Managing Climate Risks

    PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change.

    July 01, 2020 WebPage Regulatory News
    News

    EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR

    EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR).

    July 01, 2020 WebPage Regulatory News
    News

    FSB Issues Statement on Impact of COVID-19 Crisis on Benchmark Reform

    FSB published a statement on the impact of COVID-19 pandemic on global benchmark transition.

    July 01, 2020 WebPage Regulatory News
    News

    IAIS Publishes List of Internationally Active Insurance Groups

    IAIS published the list of Internationally Active Insurance Groups (IAIGs) publicly disclosed by group-wide supervisors.

    July 01, 2020 WebPage Regulatory News
    News

    FED Temporarily Revises FR Y-9C With Respect to PPPLF and CARES Act

    FED has temporarily revised the reporting form on consolidated financial statements for holding companies (FR Y-9C; OMB No. 7100-0128).

    July 01, 2020 WebPage Regulatory News
    News

    EC Launches Consultation on Review of Solvency II Directive

    EC launched a consultation on the review of the key elements of Solvency II Directive, with the comment period ending on October 21, 2020.

    July 01, 2020 WebPage Regulatory News
    News

    ECB Consults on Supervisory Approach to Consolidation in Banking

    ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector.

    July 01, 2020 WebPage Regulatory News
    News

    IAIS on Package for 2020 Data Collection on ICS and Aggregation Method

    IAIS published technical specifications, questionnaires, and templates for 2020 Insurance Capital Standard (ICS) and Aggregation Method data collections.

    June 30, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5425