The COVID-19 pandemic raises the prospect of a deep recession. Hence the unprecedentedly broad-based policy response. To cushion the economic blow, the authorities have deployed not only monetary and fiscal policies but also prudential regulation and supervision and other financial policies. This study discusses these regulations, and their impact. It provides three main principles to guide how these regulations should be constructed and carried out.
The paper makes the following key points:
- Regulatory policy responses should seek to support economic activity while preserving the financial system’s soundness and ensuring transparency.
- The recommendation for banks to make full use of capital and liquidity buffers should go hand in hand with restrictions on dividends and bonuses and clarity concerning the process for rebuilding them.
- Flexibility in loan classification criteria for prudential and accounting purposes should be complemented with sufficient disclosure on the criteria banks use to assess creditworthiness.
- The publication of detailed guidance on the application of expected loss provisioning rules, combined with sensible transitional arrangements, may constitute a balanced approach to mitigating the unintended effects of the new accounting standards.