A note on regulatory responses to COVID-19 pandemic: Balancing banks' solvency and contribution to recovery

Mohammad Bitar (1) , Amine Tarazi (2)

1 Nottingham University Business School, University of Nottingham, Jubilee Campus, Nottingham NG8 1BB, United Kingdom.
2 LAPE - Laboratoire d'Analyse et de Prospective Economique

We see spikes in unemployment rates and turbulence in the securities markets during the COVID-19 pandemic. Governments are responding with aggressive monetary expansions and large-scale economic relief plans. We discuss the implications on banks and the economy of prudential regulatory intervention to soften the treatment of non-performing loans and ease bank capital buffers. We apply these easing measures on a sample of Globally Systemically Important Banks (G-SIBs) and show that these banks can play a constructive role in sustaining economic growth during the COVID-19 pandemic. However, softening the treatment of non-performing loans along with easing capital buffers should not undermine banks' solvency in the recovery period. Banks should maintain usable buffer in the medium-term horizon to absorb future losses, as the effect of COVID-19 on the economy might take time to fully materialise.

Mots clés: COVID-19; non-performing loans; capital buffers; solvency; G-SIBs

Domaines: Sciences de l'Homme et Société; Economies et finances

Mohammad Bitar, Amine Tarazi. A note on regulatory responses to COVID-19 pandemic: Balancing banks' solvency and contribution to recovery. 2020. ⟨hal-02964598⟩