IMF Outlines Policy Steps to Address the Impact of COVID-19

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