Looking at the regulatory responses to the Covid-19 pandemic, the Financial Stability Institute of the Basel Committee underlines the need to link the various regulatory relaxing provided to banks to restrictions on dividends and bonuses and an increased transparency.
We note the relevance of these recommendations and continue to urge governments to ban dividends and bonus and closely monitor banking activity. However, we underline that key dimensions are missing from this analysis: small businesses and households should benefit from improved lending conditions and the integration of climate-related risks is essential to avoid further Covid-like disasters.
In a Brief, The Financial Stability Institute analyses the regulatory responses to Covid-19 and their effects. Its assessment takes three dimensions into account, the response needs to: support the economy, preserve the health of the banking system and not harm the long-run credibility of the financial system.
The assessment concludes that:
- To make the full use of capital buffers efficient, banks must be provided with a clear vision of how to rebuild them and restrictions on dividends and bonuses. Restrictions on dividends and bonuses must be applied to all banks in order to avoid distortions in market valuation.
- Creditworthiness assessment criteria should be disclosed.
- In order to avoid procyclical effects, loss provisioning rules should be the object of detailed guidelines.
We underline that these recommendations, coming from an institution that is not prone to promote market intervention, puts the spotlight on the emergency to ban dividends and bonuses and closely monitor banking activity.
In addition, we can’t forget that regulatory and monetary measures provide banks with liquidity at an historically low rate and with loosened conditions. Such characteristics should justify a particularly low credit rate for small businesses and households.
Finally, we stress that, while the Financial Stability Institute’s recommendations are important to adjust short-term regulatory measures, they don’t address the bigger issue of economic and financial resilience to exogenous shocks and Covid-like crisis. Building this resilience requires both the integration of climate-related risks and a precautionary approach that would put the fight against climate change at the center of the policy response.
To do so, regulatory authorities should start by adjusting countercyclical buffers to reflect the global economic and financial exposure to carbon intensive assets and by increasing banks’ capital and liquidity requirements to reflect their exposure to fossil fuels. This measures should be paired with a transformation of monetary policies to take into account climate impacts and push for a green transition and “green” recovery plans – with green funding, fossil fuel exclusions and the conditioning of help to most polluting sectors – that mobilize public funding to get out of the Covid crisis with sustainable and united societies.