Countries around the world are easing bank capital requirements to help banks absorb losses and to allow them to maintain the flow of credit during the COVID-19 crisis.
Most of these measures involve the Basel III capital standards that global regulators agreed to implement after the 2007-09 financial crisis. Thanks to Basel III and like measures, banks across the world have substantially more capital than they had heading into that crisis. However, the current crisis threatens to quickly eat into those capital cushions. Banks are already reporting substantial credit losses and growing balance sheets, as they meet existing commitments and extend new loans. Easing capital standards today is a form of macroprudential policy, because regulators’ focus is on maintaining the health of the financial system as a whole.
This blog discusses options for easing capital standards:
- Which buffer to adjust?
- Constraints on capital distribution – Do countries enforce them when reducing their capital buffers?
- How long will the change last?
- Conditions for use of capital – Does the capital need to be used for a particular purpose?
- Quality of Capital – Any change in the capital usually required to meet a buffer?
- Changing risk weights – What kind of assets get their risk weights changed?
By Priya Sankar and Greg Feldberg