BCBS Report Assesses Effectiveness of Basel Reforms During Pandemic

This report outlines the following key initial findings:

• Resilience of banking system. The analysis indicates that the banking system has remained resilient through the pandemic, strengthened by substantial increases in capital and liquidity held by banks since the adoption of the Basel reforms. Banks have generally managed to absorb temporary increases in the costs of liquidity and higher credit risk while substantially maintaining their services to customers. The analysis also indicates that more strongly capitalized banks showed greater increases in lending to businesses and households than other banks.
• Use of capital buffers. The analysis indicates that most banks maintained capital ratios well above their minimum requirements and buffers during the pandemic, partially due to the reduction in capital requirements and buffers, and the imposition of restrictions on capital distribution, and the extensive fiscal and monetary support to borrowers; this makes it difficult to draw conclusions regarding the willingness of banks to use capital buffers.
• Use of liquidity buffers. Banks met large drawdown demands on committed lines and engaged in early buybacks of funding instruments from money market funds. Despite relatively limited liquidity stress, some jurisdictional studies highlighted that a range of banks took defensive action, reflecting in part their targeting of internal liquidity coverage ratio levels well above 100%. However, these actions do not appear to have contributed materially to the wider disruption in financial markets that prompted central banks to intervene in March 2020.
• Impact of leverage ratio on financial intermediation. Bank positions in government bond and repurchase agreement (repo) markets remained stable or rose in response to the rapid surge in client demand for liquidity at the onset of the crisis, though there is evidence that leverage ratio requirements may have reduced banks’ incentives to mitigate the large imbalances that emerged in some markets.
• Cyclicality of Basel capital requirements. The analysis indicates that extensive governmental support measures to borrowers significantly dampened the impact of the economic contraction on bank capital. Measures taken to delay the recognition of credit provisions in the measurement of regulatory capital also deferred the impact. Collectively, these measures make it difficult to draw conclusions about the cyclicality of capital requirements. The analysis finds that sources of cyclicality in the current market risk framework prompted supervisors to take relief measures in several jurisdictions. However, revisions to this framework, agreed upon in January 2019, are expected to mitigate these sources of cyclicality.

The empirical analysis in the report will be updated as additional data regarding the impact of the pandemic become available. Any updates will be included in a comprehensive evaluation report covering the Basel reforms implemented over the past decade, which the Committee plans to publish in 2022. The findings will also be reflected in the interim report of FSB on financial stability lessons learnt from the COVID-19 pandemic, which is to be submitted to G20 Finance Ministers and Central Bank Governors.

Related Links

• Press Release
• Report (PDF)

Keywords: International, Banking, Basel, COVID-19, Regulatory Capital, Credit Risk, Liquidity Risk, Market Risk, Leverage Ratio, BCBS