The Bank for International Settlements (BIS) published a Bulletin that compares phases of the COVID-19 crisis with the Great Financial Crisis to assesses resilience of the largest banks through the concept of a market-adjusted, risk-weighted capital ratio (MARC) as well as through the outcome of stress tests. The MARC combines information from regulatory book value metrics with market valuation measures to provide a composite view on bank resilience. The analysis reveals that, while market valuations have largely recovered to pre-pandemic levels, a weaker tail of banks continues to struggle with anemic profitability and potential for credit losses. The resilience of these banks could be tested if credit losses materialize, following the winding down of policy support.
The analysis, which covered 360 of the largest 500 institutions from 50 jurisdictions, reveals that a forward-looking view on bank resilience can be obtained through a combination of regulatory capital ratios, market valuations, and insights from stress tests. The data show that market valuations have broadly recovered from the troughs observed at the onset of the pandemic. Although bank resilience has been buttressed by the capital and liquidity buffers raised after the Great Financial Crisis, the weaker banks, mainly from Asia and Europe, appear particularly exposed to potential setbacks in economic growth and an associated increase of credit losses once crisis-related policy support and prudential relief are phased out. In a downside scenario, there is a risk of chronically weak banks being tied to chronically weak borrowers (zombie firms). As economies recover from the crisis, efforts to address pre-existing structural vulnerabilities in the banking sector need to be reinvigorated. Against this backdrop, policymakers face the challenge of phasing out policy support without jeopardizing the recovery. Flexible, state-contingent approaches to adjusting or withdrawing support are needed. This calls for targeted measures that require beneficiaries to opt-in, while making the terms of support progressively less generous. Supervisory authorities will need to balance a supportive macro-prudential stance with timely recognition of bank losses to encourage balance sheet repair and support the monitoring of bank resilience.
Keywords: International, Banking, COVID-19, Stress Testing, Regulatory Capital, MARC, Credit Risk, Non-Performing Loans, Expected Credit Loss, Basel, BIS
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