A Note on Regulatory Responses to Covid-19 Pandemic: Balancing Banks’ Solvency and Contribution to Recovery

Abstract

We see spikes in unemployment rates and turbulence in the securities markets during the COVID-19 pandemic. Governments are responding with aggressive monetary expansions and large-scale economic relief plans. We discuss the implications on banks and the economy of prudential regulatory intervention to soften the treatment of non-performing loans and ease bank capital buffers. We apply these easing measures on a sample of Globally Systemically Important Banks (G-SIBs) and show that these banks can play a constructive role in sustaining economic growth during the COVID-19 pandemic. However, softening the treatment of non-performing loans along with easing capital buffers should not undermine banks' solvency in the recovery period. Banks should maintain usable buffer in the medium-term horizon to absorb future losses, as the effect of COVID-19 on the economy might take time to fully materialise.

Determinants of Differentiation of Cost of Risk (CoR) among Polish Banks during COVID-19 Pandemic

“…The banking sector before the pandemic crisis was characterised by a high level of regulatory capital and liquidity as well as by the relatively good quality of credit portfolios. Consequently, Bitar and Tarazi (2020) concluded that on the eve of the pandemic G-SIBs banks had been adequately capitalized. The researchers analysed the effects of prudential regulatory intervention to soften the approach to non-performing loans and ease capital buffers on these banks and the economy.…”