Tobias Adrian and Aditya Narain of the IMF, in their article titled “Maintaining Banking System Safety amid the COVID-19 Crisis” (31 March 2020), suggest how national band supervisors should respond to ensure continued trust and confidence in the banking system.
First, don’t change the rules, as it could cause more confusion.
Second, capital and liquidity buffers should be used to support continued lending.
Third, encourage loan modification through loan restructuring in the context of flexible credit risk management and accounting standards for impairment.
Fourth, don’t hide the losses which will have to be borne by banks, investors, shareholders, and even the taxpayer. Transparency helps prepare everyone.
Fifth, clarify regulatory treatment of fiscal support measures that could include borrowers, credit guarantees, payment holidays, direct transfers, and subsidies.
Sixth, strengthen communication especially in key areas such as liquidity and creditor positions, even if it involves deferring less material reporting requirements.
Seventh, strengthen coordination across borders, as the Financial Stability Board, and the Basel Committee on Banking Supervision are doing.
I am tempted to add better coordination among national level financial regulators wherever these functions are with different agencies. Moreover, it might not be sufficient to draw down the buffers. Depending on how the situation pans out, there could even be a case for reducing the capital adequacy requirements where appropriate.
The disruption is already the biggest since the second World War. The financial crisis of 2007-09, where the shocks were mostly endogenous, had in some ways helped prepare through better regulations. An exogenous shock like this where supply chains are disrupted provides for greater role for government than for central banks or bank supervisors. We might have to wait and watch out for further action.
© G Sreekumar 2021
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