IMF published a policy paper outlining steps to address the coronavirus (COVID-19) crisis worldwide. Timely and decisive actions by central banks, fiscal, regulatory, and supervisory authorities can help contain the virus outbreak and offset the economic impact of the pandemic. Central banks must support demand and confidence by preventing a tightening of financial conditions, lowering borrowing costs for households and firms, and ensuring market liquidity. Regulatory and supervisory responses must aim to preserve financial stability and banking system soundness while sustaining economic activity.
The policy paper highlights that the regulatory and supervisory response from central banks should aim to maintain the balance between preserving financial stability, maintaining banking system soundness, and sustaining economic activity. The paper highlights the following policy steps to address the impact of COVID-19:
- The economic impact of the coronavirus will affect borrowers’ capacity to service loans and depress bank earnings, which could eventually impair bank soundness and stability. Banks should be encouraged to use flexibility in existing regulations and undertake prudent renegotiation of loan terms for stressed borrowers. Loan classification and provisioning rules should not be eased and it is critical to measure nonperforming loans and potential losses as accurately as possible.
- Transparent risk disclosure and clear communication of supervisory expectations on dealing with the implications of the outbreak will be important for market discipline to work effectively. Supervisors should heighten monitoring of financial soundness, enhance frequency of dialog with regulated entities, and prioritize discussions on business continuity planning and operational resilience.
- Liquidity buffers should be used if needed and enhanced supervisory reporting could be introduced to monitor liquidity strains. Banks should draw on existing buffers to absorb costs of restructuring, first drawing down their capital conservation buffer, or CCB, to absorb losses; supervisors should ensure that dividend distributions are revised, as needed. When already activated, countercyclical capital buffers, or CCyB, may be also released.
- Central banks should provide liquidity to support market functioning and ease stresses in key funding markets, through open market operations, expanded term lending, and other measures such as outright purchases and repo facilities.
- Temporary targeted measures will support sectors that have been hit the hardest. To complement generalized policy measures, more targeted support for certain asset classes should be considered.
- Coordinated action by G7 central banks can provide stability to the global economy and financial markets. This includes coordinated monetary easing and swap lines to lessen global financial market stresses and liquidity pressures, including swap lines to emerging market economies.
Related Link: Policy Paper
Keywords: International, Banking, NPLs, COVID 19, Disclosures, Regulatory Capital, Credit Risk, Liquidity Risk, Financial Stability, Systemic Risk, Central Banks, IMF
Previous ArticleHKMA Reduces Countercyclical Capital Buffer for Banks to 1%
APRA updated the lists of the Direct to APRA (D2A) validation and derivation rules for authorized deposit-taking institutions, insurers, and superannuation entities.
EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience.
ECB published an opinion (CON/2020/22) on proposals for regulations amending the securitization framework of EU, in response to the COVID-19 pandemic.
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.
MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.
FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.
ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021.
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.