Unwinding COVID-19 Policy Interventions for Banking Systems

Wednesday, July 7

Ms. Ana Carvalho, Senior Financial Sector Expert, International Monetary Fund
Mr. Dermot Monaghan, Senior Financial Sector Expert, International Monetary Fund
Mr. Csaba Csávás, Senior Economist, Central Bank of Hungary 
Mr. Andriy Danylenko, Senior Expert, Financial Stability Department, National Bank of Ukraine 

Mr. Reiner Martin, Lead Economist, Joint Vienna Institute

Country authorities around the world have implemented wide-ranging extraordinary measures to help contain the financial implications of physical distancing restrictions on households, corporates, and financial firms. Using these measures over prolonged periods can undermine credit discipline, misallocate scarce resources to zombie firms, and deter investment. In this webinar, experts from the IMF, the Hungarian National Bank and the National Bank of Ukraine discussed guidance, broad principles and country experiences with managing the exit from regulatory and supervisory measures already taken, including borrower support, bank capital, and liquidity measures.

The presenters discussed ways to prioritize supervisory tasks during the exit process, the trade-offs entailed by unwinding decisions and steps that authorities should take when the exit appears challenging and banks’ asset quality is likely to deteriorate sharply, including situations that might evolve into systemwide banking sector stress.

Ms. Ana Carvalho and Mr. Dermot Monaghan (both IMF), argued that regulatory and supervisory policies will play a critical role in preserving financial stability and credit discipline and ensuring that the flow of credit to the real economy is sustained during the unwinding period. They suggested a number of principles and recommendations, although due consideration should be applied to country specific circumstances. Blanket freezes on debt repayments, foreclosures, and insolvency proceedings should be replaced with targeted and timebound support to distressed but viable borrowers and eligibility criteria for government support should be progressively tightened. The true asset quality and provisioning situation should be recognized, and provisioning rules should continue to apply respectively be restored. Banks with high NPLs should be required to develop internal NPL management capabilities, plans, and tools. Regulatory measures that are incompatible with accounting requirements and international capital and liquidity standards should be reversed while allowing for some flexibility in timing. Dividend distributions and share buybacks should remain limited while bank profitability remains distorted and eventual losses remain highly uncertain. Supervisory monitoring should be intensified until extraordinary measures are withdrawn and banks should be required to continually assess borrowers’ creditworthiness. Given the current high uncertainty, bank resolutions should be avoided while pandemic restrictions apply. Financial safety nets should be reviewed and if needed strengthened and authorities should be ready to intervene swiftly if significant problems emerge after the removal of exceptional policy support. Finally, decisions related to the preparation and implementation of unwinding policies should be communicated with “one voice” and provide clear timelines.

Mr. Csaba Csávás (MNB) started by introducing the range of monetary policy instruments used by the Central Bank of Hungary (MNB) as a reaction to the coronavirus pandemic in Spring 2020. In particular he reviewed the main aims and motivations behind the different liquidity providing instruments deployed by MNB and their evolution over time. As a result of the asset purchase and liquidity provision programs of the MNB, banking sector liquidity in Hungary increased substantially, enabling the Hungarian banking sector to function properly during the pandemic. Mr. Csávás then explained that the various COVID-19 related monetary policy instruments started to be unwound respectively modified in the Autumn of 2020. In its communication with financial markets, the MNB stated in January 2021 that it will extend purchases to include government papers with maturities of less than 10 years, ensuring continuous liquidity over the middle segment of the yield curve and in June 2021 that it aims to maintain a lasting presence in the market. Moreover, MNB mentioned that it will use a flexible approach towards changing the quantity and structure of purchases.

Mr. Andriy Danylenko (NBU), recalled that at the beginning of the COVID-crisis, the NBU deployed virtually every anti-crisis instrument available to it, including monetary, regulatory and supervisory measures. NBU’s decisions were in line with best international practices. That included easing capital requirements, limiting dividend distribution and offering longer-term refinancing facilities. The NBU also cut its key policy interest rate in the first half of 2020. The NBU’s resolute and timely actions quelled the market panic in March 2020 and helped preserve confidence in the banking system. The financial sector successfully weathered through the coronavirus crisis and continued to perform its functions properly. In fact, NBU employed even fewer measures than it was ready to use at the beginning of the crisis. By now, some of the measures have expired, while others are being wind down right now. Going forward, the NBU returns to its pre-crisis path of fully implementing Basel recommendations and acquis.

Reiner Martin, Lead Economist, JVI


Share this page

© 2021 Joint Vienna Institute, Mariahilferstrasse 97, A-1060 Vienna, Austria, Tel: +43 1 798-9495, Email: jvi@jvi.org