Banking reforms post financial crisis helped cushion the impact of Covid-19 shock

The Bank for International Settlements (BIS) has published an interim evaluation report assessing the impact of banking reforms, in response to the global financial crisis of 2007-09, in light of the Covid-19 pandemic.

The Basel post-crisis regulatory reforms, set up by the BIS in response to the global financial crisis of 2007-09, were aimed to strengthening the regulation, supervision and risk management of banks. The report provides a preliminary assessment of whether the reforms implemented to date have worked, bearing in mind the banking system performance during the Covid-19 crisis.

Some key initial finding of the report are as follows:

• The reforms helped cushion the impact of Covid-19 shock, while allowing banks to continue providing credit to the economy: The report finds that “the increased quality and higher levels of capital and liquidity held by banks have helped them absorb the sizeable impact of the Covid-19 pandemic thus far, suggesting that the Basel reforms have achieved their broad objective of strengthening the resiliency of the banking system”, allowing the banking system to continue performing its fundamental functions, providing credit and other critical services. In this regard the report points out to the fact “that no international active bank has failed or required significant public sector funding since the onset of the pandemic”.
• However, some fine tune in specific features could be considered: Although the report does not propose any concrete review of the framework, it acknowledges that further consideration should be given to capital and liquidity buffers, the contracyclicality of the framework, and the treatment of central bank deposits in the leverage ratio. For instance, regarding capital buffers, the report states that it is unclear whether the reluctance to use them “reflects banks’ uncertainty regarding potential future losses or the wider market stigma that may result if a bank were to operate in its buffers”.