Banks should be encouraged to undertake prudent renegotiation of loan terms for stressed borrowers, but loan classification and provisioning rules should not be eased.
The IMF (International Monetary Fund) has published a set of policy recommendations to help health authorities, central banks, fiscal, regulatory and supervisory authorities contain the coronavirus outbreak and offset the economic impact of the pandemic.
According to the IMF, the regulatory and supervisory response should aim to maintain the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.
While acknowledging that borrowers’ capacity to service loans will be affected – which may depress banks’ earnings and eventually impair bank soundness and stability – the IMF says loan classification and provisioning rules “should not be eased”, as it is critical to measure NPLs (nonperforming loans) and potential losses as accurately as possible.
Regulatory and supervisory authorities should, however, encourage banks to use flexibility in existing regulations and undertake prudent renegotiation of loan terms for stressed borrowers.
Transparent risk disclosure and clear communication of supervisory expectations are also important for market discipline to work effectively, the IMF says, adding that supervisors should heighten monitoring of financial soundness, enhance frequency of dialogue with regulated entities, and prioritise discussions on business continuity planning and operational resilience.
Liquidity buffers should be used if needed, such as to absorb costs of debt restructuring, where banks should first drawing down their capital conservation buffer (CCB) and to absorb losses.
Supervisors should ensure enhance reporting to monitor liquidity strains, ensure dividend distributions are revised, and – where already activated – release countercyclical capital buffers (CCyB).
> ALSO READ: HKMA Responds to Fed Rate Cut, Reduces CCyB (16 Mar 2020)
Regulatory and supervisory authorities may additionally need to step in with additional support measures to support banks, including credit guarantees, asset purchase programmes, capital injections and broad deposit guarantees.
Central banks, meanwhile, should support demand and confidence by easing financial conditions, ensuring the flow of credit to the real economy, and fostering liquidity in domestic and international financial markets.
Additionally, fiscal stimulus should urgently be provided to affected people and firms to prevent long-lasting economic damage.
The IMF itself stands ready to mobilise its USD 1 trillion lending capacity to help its membership fight the coronavirus pandemic and its widespread human, economic and financial costs.
As a first line of defence, the IMF can deploy its flexible and rapid-disbursing emergency response toolkit to help countries with urgent balance-of-payment needs.
It already has 40 ongoing arrangements—both disbursing and precautionary—with combined commitments of about USD 200 billion.
The full statement from the IMF is available here.