Using capital resources to support the real economy and absorb losses should take priority over discretionary distributions. HQLA stocks should be used to meet liquidity demands.
The BCBS (Basel Committee on Banking Supervision) and FSB (Financial Stability Board) have each issued statements in support of capital and liquidity buffers being freed up to maintain financial stability during market stress related to Covid-19.
“The Basel III standards have strengthened the resilience of the banking system over the past decade. The global banking system has significantly higher levels of capital and liquidity, and is therefore in a stronger position to absorb shocks and mitigate interruptions to banking services,” the BCBS said.
“The global financial system today is in a better position to withstand shocks, maintain market functioning and sustain the supply of financing to support the real economy as a result of post-crisis reforms,” the FSB said.
Both noted that member jurisdictions are already pursuing regulatory and supervisory measures to alleviate the financial stability impact of Covid-19, such as measures targeting continued lending by banks and facilitating their ability to absorb losses in an orderly manner.
“The Committee supports the objectives of these measures and notes that members have flexibility to undertake further measures if needed,” the BCBS said, adding that Basel III capital and liquidity buffers are designed to be used in periods of stress.
These buffers include the capital conservation buffer, the countercyclical capital buffer, buffers for systemically important banks, and banks’ stock of high-quality liquid assets (HQLA).
“Using capital resources to support the real economy and absorb losses should take priority at present over discretionary distributions. HQLA stocks should be used to meet liquidity demands,” the BCBS said.
The FSB said it encourages authorities and financial institutions to make use of the flexibility within existing international standards to ensure that capital and liquidity resources in the financial system are available where they are needed.
The BCBS is suspending consultation on all policy initiatives and postponing all outstanding jurisdictional assessments planned in 2020 under its RCAP (Regulatory Consistency Assessment Programme).
It is also considering additional measures to support the financial and operational resilience of banks and the supervisory community.