Featured Product

    FSI Note Discusses Challenges Associated with COVID Relief Measures

    August 06, 2020

    The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic. These temporary relief measures introduced by governments and banks include public guarantees and payment deferrals to support struggling borrowers. The note highlights that the most consequential challenge for prudential authorities will be how and when to exit from these exceptional regulatory relief measures, particularly if credit risks continue to mount on bank balance sheets.

    The note briefly summarizes key features of the public guarantees and payment deferral schemes, how COVID-affected borrowers that have been granted debt relief are classified under the BCBS prudential guidelines on problem assets, and how such exposures and the related expected credit loss (ECL) provisions are considered in calculating regulatory capital. It then examines the implications of regulatory relief measures on key prudential metrics and outlines the supervisory challenges arising from these relief measures. In view of these challenges, the note describes the following practical steps that prudential authorities can take to enhance their supervisory risk assessments and to support banks’ efforts to reflect credit risk in their reported regulatory measures:

    • Ensure that banks proactively utilize the UTP criterion—independent of public guarantees—to determine the stock of reported nonperforming exposures
    • Assess, under Pillar 2, whether the minimum Pillar 1 credit risk capital requirements under the standardized and internal ratings-based approaches are sufficient in relation to a bank’s stock of nonperforming exposures and other low-quality assets
    • Determine the cumulative amount and realizability of the “interest accrued but not collected” line item associated with borrowers granted payment deferrals
    • Provide guidance to banks on how to reflect the impact of partial guarantees that may be provided to incentivize lending to affected borrowers, for the purpose of calculating risk-based capital requirements
    • Encourage banks to consider using, where appropriate, other forms of credit modifications, such as principal haircuts—rather than relying solely on payment deferrals that must be repaid—particularly for borrowers that have already been identified as unlikely to pay their rescheduled debts

    The note highlights that, as long as the fallout from the pandemic continues, these temporary relief measures are likely to remain in the prudential framework, while credit risks continue to mount on bank balance sheets. This dichotomy poses risks to financial stability, particularly if credit losses materialize after the payment holiday period ends and the regulatory relief measures can no longer prevent heightened credit risks from being fully reflected in a bank’s reported level of non-performing exposures and common equity tier 1 risk-based capital (CET1 RBC) ratio, both of which are widely used benchmarks to assess the health of banks and national financial systems. The conclusion is that, going forward, the most consequential challenge for prudential authorities will be how and when to exit from these exceptional regulatory relief measures. Acting too early may be counterproductive and could exacerbate a credit crunch, while waiting too late may undermine confidence in the regulatory regime and threaten systemic stability. As with all difficult decisions in prudential supervision, making the right calls, at the right time will involve the use of sound judgment; the judgments made, particularly in these unprecedented times, can have a ripple effect on the wheels that grease the global economy

     

    Related Links

    Keywords: International, Banking, COVID-19, Loan Guarantee, Payment Deferrals, Credit Risk, Regulatory Capital, ECL, NPE, Basel, FSI, BIS

    Featured Experts
    Related Articles
    News

    BSP Tackles Aspects of Lending and Islamic, Open & Sustainable Finance

    The Central Bank of the Philippines (BSP) issued communications covering developments related to online lending platforms, open finance framework and roadmap, and on the expected regulations in the area sustainable finance.

    January 16, 2022 WebPage Regulatory News
    News

    US Agencies Issue Regulatory Updates, FDIC Launches Tech Sprint

    The Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.

    January 13, 2022 WebPage Regulatory News
    News

    EBA Issues Guide on Bank Resolvability, Consults on Transferability

    The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).

    January 13, 2022 WebPage Regulatory News
    News

    MFSA Publishes CRD5 Updates and Supervisory Priorities for 2022

    The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0.

    January 13, 2022 WebPage Regulatory News
    News

    HKMA Extends Repayment for Trade Facilities, Consults on Crypto-Assets

    The Hong Kong Monetary Authority (HKMA) published a circular, along with the reporting form and instructions, for self-assessment, by authorized institutions, of compliance with the Code of Banking Practice 2021.

    January 12, 2022 WebPage Regulatory News
    News

    FCA Registers Securitization Repositories; PRA Issues 2022 Priorities

    The Financial Conduct Authority (FCA) decided to register European DataWarehouse Ltd and SecRep Limited as securitization repositories under the UK Securitization Regulation, with effect from January 17, 2022.

    January 12, 2022 WebPage Regulatory News
    News

    EC Regulation Sets Out Methods for Measuring K-Factors Under IFR

    The European Commission (EC) published the Delegated Regulation 2022/25, which supplements the Investment Firms Regulation (IFR or Regulation 2019/2033) with respect to the regulatory technical standards specifying the methods for measuring the K-factors referred to in Article 15 of the IFR.

    January 11, 2022 WebPage Regulatory News
    News

    BIS Studies How Platform Models Impact Financial Stability & Inclusion

    The Bank of International Settlements (BIS) published a paper that assesses the ways in which platform-based business models can affect financial inclusion, competition, financial stability and consumer protection.

    January 10, 2022 WebPage Regulatory News
    News

    CBE Issues Additional Measures to Ease Disruptions from Pandemic

    The Central Bank of Egypt (CBE) published a circular with instructions on emergency liquidity assistance to banks that are unable to meet their liquidity requirements.

    January 10, 2022 WebPage Regulatory News
    News

    ESAs Publish List of Financial Conglomerates for 2021

    The European Supervisory Authorities (ESAs) published the list of identified financial conglomerates for 2021.

    January 07, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 7868