Adjusting to a New Reality: JVI Launches a New Webinar Series

Banking Sector Regulatory and Supervisory Response to Deal with the Impact of Coronavirus

Monday, May 18

Mr. Rachid Awad, Mr. Caio Ferreira, and Mr. Luc Riedweg, all IMF, Monetary and Capital Markets Departments

On May 18, 2020, the JVI kicked off a new webinar series to share useful information and discuss issues critical for policymakers in the turbulent pandemic environment. In the inaugural webinar, Messrs. Rachid Awad, Luc Riedweg, and Caio Ferreira from the IMF Monetary and Capital Markets Department explained current IMF thinking about the “Banking Sector Regulatory and Supervisory Response to Deal with the Impact of Coronavirus.” 

With face-to-face training in Vienna impossible since early March, the JVI has been working on new ways to stay usefully connected with its constituents. In May it launched a new webinar series to analyze the latest developments and discuss optimal pandemic-responsive policies to promote financial stability, fiscal policy, and effective macroeconomics. It opened the series with a webinar on “Banking Sector Regulatory and Supervisory Response to Deal with the Impact of Coronavirus” that featured Rachid Awad, Luc Riedweg, and Caio Ferreira of the IMF Monetary and Capital Markets Department expanding on the most recent IMF policy guidance note.

JVI Director Thomas Richardson opened the event by highlighting the importance of the webinar series as a forum for discussing issues critical to policymakers responding to the current economic shock. JVI Lead Economist Reiner Martin and Economist Maria Arakelyan acted as moderators. In introducing the presenters, Mr. Martin noted that the large number of registrations demonstrated the relevance of the topic.

The presenters shared their views on appropriate regulatory and supervisory responses to balance preserving financial stability, ensuring that the banking system is sound, and sustaining economic activity throughout the pandemic. They also warned, however, that there are gray zones where situations should be handled case-by-case. Mr. Ferreira opened the presentation with a broad overview of representative policy recommendations for supervisory authorities, and Mr. Awad and Mr. Riedweg expanded with details on specific issues. Their main recommendations were these:

  • Use the flexibility embedded in the prudential framework but adhere to minimum prudential standards. In particular, banks should be encouraged to use the capital and liquidity buffers they have built up. It is also advisable, where available, to ease macroprudential measures by, e.g., releasing countercyclical capital buffers. Moreover, on prudential grounds, the policy measures can go a step further by suspending capital distributions such as dividend payments, and share buybacks so as to ensure that capital buffers are gradually replenished. If buffers are not sufficient to absorb losses, banks should submit a credible medium-term capital restoration plan. Throughout, close monitoring and engagement of supervisors with each bank are vital. 
  • Facilitate policy measures while working to minimize any associated moral hazard. Regulation may need to be adjusted to reflect the unprecedented government support provided in many countries. Two measures that have been widely used are moratoria or repayment holidays and credit guarantees for some sectors or types of loans. Supervisors should provide guidance on how supporting measures should be considered within the prudential framework. Supporting measures should be carefully targeted and have a clear exit strategy to avoid creating moral hazard issues. 
  • Provide guidance on asset classification and provisioning and keep what is happening in the banking sector transparent. The unprecedented uncertainty about the pandemic impact on economic activity makes it difficult to reliably estimate credit losses, so supervisory guidance is important. It may be necessary to revise automatic reclassification for restructured loans to better consider the nature of the pandemic shock and avoid unintended procyclical effects. Banks should not feel encouraged to hide losses, which could create moral hazard and transparency issues. They should continue to apply sound underwriting standards and put in place policies for reclassification and loan loss provisioning. Exposures and the amount of provisioning should be reassessed regularly as the situation evolves. 

A lively Q&A session followed the presentation, with the speakers providing more details on specific questions. They again emphasized the importance of having a flexible, dynamic view of the issues and close supervisory monitoring of the situation.

Reiner Martin, Lead Economist, JVI
Maria Arakelyan, Economist, JVI


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