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Maintaining Banking System Safety amid the COVID-19 Crisis

Tobias Adrian, Aditya Narain

March 31, 2020

This blog is part of a special series on the response to the coronavirus.


By Tobias Adrian and Aditya Narain

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Today we face economic upheaval potentially more severe than we witnessed during the global financial crisis. The coronavirus pandemic is a different kind of shock. Never before have modern economies shut down at the drop of a hat. From one week to the next, many workers lost their jobs and paychecks. Restaurants, hotels, and airplanes all emptied. And consumers and businesses now face steep losses in income—and potentially widespread bankruptcies.

Pressure on the banking system is growing and higher defaults on debt are imminent. And many now expect a shock to the financial sector similar in magnitude to the 2008 crisis.

Like the health experts, bank supervisors are responding to a fast-moving and extraordinary situation.

The question on the minds of policymakers is how they should prepare for this.

Just over a decade ago, global policy makers came together in an unprecedented display of coordination to launch the development of a revamped regulatory framework for the financial sector. They significantly raised the minimum standards for the quality and quantity of bank capital and liquidity and succeeded in building a more resilient banking system designed to hold buffers above the minimum that could be safely drawn down in stressed conditions.

In the current crisis, national authorities are taking a host of measures to provide fiscal support, and central banks are opening new liquidity lines. How should bank supervisors respond to ensure continued trust and confidence in the banking system?

Banking system prescription

Like the health experts, bank supervisors are responding to a fast-moving and extraordinary situation. Supervisors must combine the tools from their playbooks for dealing with natural disasters, operational risk events, and bank stress episodes. With its global vantage point, and drawing from past experience, the IMF can offer some additional guidance on the way forward:

Will it be enough?

Simply put, it may be too early to tell. At this point, conditions in many countries are as severe as the adverse scenario of the stress tests that banking regulators commonly use to assess the strength of their banking systems.

And it might get worse.

All of this assumes that economic activity could restart later this year, but we have to also consider more adverse scenarios. Under more severely strained circumstances, we will have to rethink our playbook substantially. Some banking systems might have to be recapitalized or even restructured. The IMF has deep experience in helping countries rebuild distressed banking systems through its technical assistance programs, and will stand ready to help.

Related link:

The IMF and COVID-19
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