Compromising the policies excessively in the short run can create serious long-term damage.
Bank of International Settlements
Under these prudential requirements, banks are mandated to control risks and hold adequate capital as defined by capital requirements, liquidity requirements, by the imposition of concentration risk (or large exposures) limits, and by related reporting and public disclosure requirements. By delaying the implementation of certain regulations and recalibrating them, this frees up banks to focus on providing support to the economy, including the use of buffers to maintain the flow of liquidity for corporates.
Key regulators such as the European Central Bank (ECB) and the US Federal Reserve Bank have issued guidance on how they see these being implanted between national authorities and banks. These include full use of capital and liquidity buffers (see Figure 1), ncluding Pillar 2 Guidance and relief in the composition of capital for Pillar 2 Requirements.
On the ECB’s direction, macroprudential policy actions by several euro area authorities8 (including central banks and banking supervisors) have reduced capital requirements, including the countercyclical capital buffer (CCyB) and other macroprudential buffers. The overall impact of these measures will be to free up more than €20bn of Common Equity Tier 1 capital held by euro area banks, thereby facilitating the absorption of losses and supporting the provision of credit to the economy. These macroprudential actions complement and reinforce the measures announced by ECB Banking Supervision since 12 March 2020, including requesting banks to not pay dividends or buy back shares during the pandemic9.
The Bank of England has also acted by reducing the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect for an expected 12 months. The BoE, issued guidance to UK banks regarding the measures firms should be taking to support businesses and consumers during the ongoing COVID-19 outbreak, namely through the implementation of the COVID Corporate Financing Facility (CCFF) and the Coronavirus Business Interruption Loan Scheme (CBILS).10 The CCFF11, which has a lifespan of at least 12 months, will buy short-term debt from larger companies, which are fundamentally strong, but have been affected by a short-term funding squeeze. Another BoE initiative, the Contingent Term Repo Facility (CTRF) allows participants to borrow central bank reserves (cash) against specified collateral for three months12.
In the US, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains several provisions that contemplate financing programs to be administered by the Treasury Department or the Federal Reserve. The act has a provision for a US$2trn fiscal package including a new US$500bn fiscal package to help assist and guarantee loans to companies and US$350bn to help small businesses. The Fed announced programmes intended to provide liquidity to businesses and has set out conditions13. Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance will provide bridge financing for up to four years, a Secondary Market Corporate Credit Facility (SMCCF) will lend, on a recourse basis, to an SPV that will purchase corporate debt issued by eligible issuers in the secondary market, and a Term Asset-Backed Securities Loan Facility (TALF) is intended to facilitate the issuance by private entities of asset-backed securities (ABS).
In a another move, to facilitate the offering of Paycheck Protection Program loans to small businesses, the Fed lifted asset caps on lenders including a US$1.95trn asset cap it had imposed on Wells Fargo in 2018. The regulator is adopting this interim ?nal rule to allow banking organisations to neutralise the regulatory capital effects of participating in this facility.