Supervisory Responses to the Impact of COVID-19 on Credit Quality

Supervisory authorities and international accounting standard setters have responded to the COVID-19 outbreak in part by emphasizing – or creating – flexibility in the application of accounting and regulatory standards for the treatment of potentially impaired loans. This enables banks to reduce the extent to which non-payments of interest and principal feed through to higher provisioning and higher capital weightings, and thereby to reduce the adverse impact on their measured regulatory capital ratios. In effect, the authorities are accepting a higher level of risk in pursuit of the wider goal of keeping borrowers afloat during a difficult time and promoting economic recovery. But there are limits to how far this can go without leaving banks in an unsound position.

This Note discusses some of the immediate and medium-term options for banking supervisors in response to the COVID-19 outbreak. It covers the application of accounting standards, the calculation of regulatory capital, and some practical advice for the actions that supervisors should be taking.