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%
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.
In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.
The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.
The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.
The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.