Models – and some implications – of Covid-19 financial sector policy interventions

This prudential line of action operates mainly through a temporary relaxation of certain key regulatory and prudential requirements, for example on the use of buffers, the reporting or treatment of overdue loans. In most of the G20 economies, and in some non-G20 emerging market economies with well-developed financial markets, the package also includes clear prudential guidance and expectations on how banks should use this news effectively and wisely. flexibility. The main measures followed in the prudential category are: moratoriums on loan repayment (18% of all prudential measures), support or facilitation of loan restructuring (10%), relaxation of the classification and / or the provisioning of non-performing assets (NPA), (7% and 6%, respectively) and the release or carry-over of existing capital buffers (6%).

The use of cushions and the facilitation of loan restructuring are fully aligned with the existing regulatory framework. But other flexibility mechanisms, such as the use of moratoriums and flexibility in the treatment of NPAs, could involve regulatory forbearance. This needs to be assessed very carefully and aligned with minimum prudential standards. The easing of financial conditions and the exercise of some regulatory forbearance may be necessary as long as conditions remain difficult, although this could have important implications for the stability of the financial sector in the medium term. These measures should avoid increasing financial risks, especially in already vulnerable systems. Decisions must be extraordinary, time-bound, transparent and based on rigorous risk assessments. Banks should be required to produce and publish reliable, frequent, up-to-date and comparable information on loans that have benefited from borrower relief measures. Banks should continue to apply prudential regulatory measures relevant in terms of classification and provisions, especially when the net present value of loans changes due to the application of relief measures. In countries with pre-existing financial vulnerabilities, including supervisory capacity constraints, low reserves and poor financial safety net, abuse of regulatory forbearance can now be of particular concern.

The full effect and duration of the COVID-19 crisis is still unknown, and its peak and second-round effects are yet to come in most countries. With debt at record levels, the close interconnections between the sovereign, financial and corporate sectors can give rise to unfavorable feedback loops, especially in countries with more crisis and corporate insolvency management frameworks. weak. It is crucial to continue to strengthen the resilience of the financial sector, while helping to mitigate the impact of the crisis, so that it can now play its counter-cyclical role and support the economy in the recovery phase.

Source link

About Franklin Cheatham

Check Also

Orlando City sends Santiago Patiño on loan to Mexican side

Barely had City of Orlando signed on a new striker, the Lions sent one on …