Featured Product

    BIS on Role of Capital and Liquidity Buffers in Easing COVID Crisis

    April 24, 2020

    BIS published a short note or bulletin that explores the conditions under which the release of prudential buffers might help address the shock caused by the COVID-19 pandemic. The note first assesses the impact of the economic fallout from the crisis and the related policy measures on banks. It then reviews the design and usability of prudential buffers, before moving on to discuss how the relaxation of such buffers can support bank credit. Thus far, the prudential authorities have sought to support the flow of credit to firms, households, and governments, most notably by relaxing banks’ constraints on the use of liquidity and capital buffers.

    The note further highlights that for banks to continue playing a positive role in the supply of funding during the recovery, they should maintain usable buffers for a long period, as losses from a severe recession will take time to materialize. Bank counterparties, market participants, and the public need to remain convinced that  buffers in the banking systems will help them weather economic stress. If past experience is any guide, buffers will be needed for quite some time. However, no matter how aggressive, the release of available buffers is unlikely to suffice on its own to compensate fully for the recession-induced erosion of capital.

    For example, the CCyB put in place by BCBS jurisdictions before the COVID-19 crisis was set no higher than 2.5% of risk-weighted assets, with the CCyB of most jurisdictions being well below that level. Even tripling this amount by tapping into other buffers—while keeping some resources unused—would be only just enough to absorb the losses estimated in central bank stress tests. In recent versions of those exercises, recession-induced capital erosion was calculated to rise to 4.0% to 7.5% of risk-weighted assets (US, UK, and EU). Given that the impending global recession is likely to match or exceed the most adverse scenarios embedded in these past exercises, capital erosion may be much larger, even if governments intervene to support banks (for example, with guarantees).

    A buffer release will be most effective if included within a general strategy for managing the evolution of the pandemic’s economic impact with a portfolio of tools. Lessons from the past indicate that this strategy should have a medium-term horizon and combine transparency, effective market discipline, and preservation of intermediation capacity. It should help to avoid a financial crisis that will worsen the macroeconomic problem. Reading through this lens the messages from successful resolution of past banking crises, the restoration of credit flows to the real economy will be short-lived if banks become weighed down with bad assets and no buffers. Furthermore, government guarantee schemes should require banks to keep “skin in the game,” thus both protecting the solvency of the public sector and leveraging the ability of lenders to discriminate between good and bad credit. Preserving monetary and fiscal space is key, as the resilience of banks is likely to depend for a long time on a combination of buffers and non-prudential policies.

     

    Related Link: Bulletin

     

    Keywords: International, Banking, COVID-19, Bulletin, Macro-Prudential Policy, Capital Buffers, LCR, CCyB, Procyclicality, Regulatory Capital, Liquidity Risk, BIS

    Featured Experts
    Related Articles
    News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Capital Adequacy Standards for Banks

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.

    November 29, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Guidance on Management of Climate Change Risks

    The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.

    November 26, 2021 WebPage Regulatory News
    News

    EBA Publishes Single Rulebook Q&A Updates in November 2021

    The European Banking Authority (EBA) Single Rulebook Question and Answer (Q&A) tool updates for this month include answers to 10 questions.

    November 26, 2021 WebPage Regulatory News
    News

    EC Finalizes Rules on Internal Approaches Benchmarking Exercise

    The European Commission, or EC, finalized the Implementing Regulation 2021/2017 with respect to the benchmark portfolios, reporting templates, and reporting instructions for the supervisory benchmarking of internal approaches for calculating own funds requirements.

    November 26, 2021 WebPage Regulatory News
    News

    EC Proposes New Measures Under Capital Markets Union Package

    The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.

    November 25, 2021 WebPage Regulatory News
    News

    European Council Adopts Position on Digital Finance Package Proposals

    The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).

    November 25, 2021 WebPage Regulatory News
    News

    PRA Proposes Rulebook Changes; BoE Extends BEEDS Testing Window

    The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.

    November 25, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7740