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%
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.