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Coronavirus: Easing bank regulation and supervision would further increase the risk of a financial crisis on top of a health crisis

Banking

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Brussels, 11 March 2020 – Finance Watch, the public interest association dedicated to make finance serve society, warns regulators and policymakers not to indulge the calls of banks for deregulatory measures in light of the coronavirus outbreak.

Thierry Philipponnat, Head of Research and Advocacy at Finance Watch, said:

“Prudential rules exist to make sure banks remain resilient in times of economic crisis and be able to continue lending in support of the economy. It would be contradictory to ease them when they are most needed.

“The European Union has been working since the last financial crisis on building a banking system better able to resist crises whilst serving the economy and it would make no sense to start undoing what has been done precisely when a crisis seems to be hitting.”

The following measures currently considered by governments and regulators or promoted by the banking industry should therefore not be implemented:

  • Regulators should not extend deadlines before outstanding loans are considered “non-performing loans” (NPLs): Currently, loans are considered as non-performing in case of late payment of more than 90 days. This should stay as such. Not calling a non-performing loan by its name does not make it less risky, quite the contrary. When a crisis hits, supervisors and investors alike need to have a clear picture of the situation, not a blurred one.
  • Supervisors should not postpone stress tests: Assessing the resilience of financial institutions is all the more important in times of adverse market developments. Supervisors need the right information to make the right decisions and making them run blind will not make the crisis go away.

Macroprudential authorities should also be wary of abandoning counter-cyclical buffers for the wrong reason: Counter-cyclical buffers are tools to enhance financial stability and supervisors have to assess thoroughly whether a time of greater financial instability is well chosen to decide not to use such tools.

If policymakers decide to implement such measures, they run the risk of putting the burden of under-capitalised banks, once again, on the shoulders of tax-payers who would potentially be called upon for bailing them out.

ENDS

For further information or interview requests, please contact:

Charlotte Geiger, Head of Communications and Networks, at charlotte.geiger@finance-watch.org, +32 / 2 880 0441 or +32 (0)474331031.

NOTES TO EDITORS

In the UK, the Bank of England told banks today they can tap one of their capital buffers during the coronavirus epidemic, but warned they must not use the cash for bumping up bonuses or dividends: „BoE allows banks to tap capital cushion during coronavirus”, Reuters, 11 March 2020.

In Germany, officials from the Finance Ministry met with counterparts at BaFin and the Bundesbank on Monday in Berlin to discuss easing a planned rule that banks bolster reserves in good times: „Germany Mulls Bank Capital Relief to Counter Coronavirus Hit“, Bloomberg, 10 March 2020.

In France, the government considers several options to deregulate banks, such as measures on NPLs, stress-tests and counter-cyclical cushions: „Coronavirus : Bercy prêt à tout pour mobiliser les banques“, Les Echos, 9 mars 2020.

In Italy, the national banking association (Abi) asked to relax rules that force banks to classify a borrower as being in default if they do meet a debt repayment deadline within 90 days: „Italy banks ask for bad loan truce as coronavirus hits the economy“, Reuters, 6 March 2020.

In the United States, the Bank Policy Institute, an industry lobbying group, asked the Federal Reserve to lower capital requirements so banks can respond to economic turmoil created by the coronavirus: “Actions the Fed Could Take in Response to COVID-19”, 1 March

ABOUT FINANCE WATCH

Finance Watch is a European, not-for-profit association of civil society Members, dedicated to making finance work for the good of society. It works for a financial system that allocates capital to productive use through fair and open markets, in a transparent and sustainable manner, in line with society’s needs and without exploiting or endangering society at large.

Finance Watch Members are supported by a professional full-time secretariat recruited mainly from the financial and policy sectors, with strong communications and stakeholder engagement capacities, to conduct advocacy and provide technical know-how and coordination for our civil society network.

For more information about the Finance Watch governance and funding, please visit the Finance Watch website: https://www.finance-watch.org/governance-funding/

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