When and how to unwind COVID-support measures to the banking system?

IN-DEPTH ANALYSIS of the European Parliament

In the current crisis, public authorities took several unprecedented measures to support the economy. Importantly, EU regulators and supervisors gave banks leeway in meeting regulatory requirements. In general, temporary capital and liquidity relief measures during a recession are well justified to avoid procyclicality and to help ensure continued lending by banks. The recent European experience shows that undercapitalised banksloaded-upwith a vast amount of government debt, shrunk their loan books and thusslowed the economic recovery after the Global Financial Crisis (GFC). Against this background, this policy briefing discusses when and how to unwind banking supervisory relief measure. (link to the document)

Understanding the effect of COVID related policy response on bank balance sheets is important to design a balanced exit strategy. To this end, the paper examines the support measures deployed so far, placing emphasis on those affecting bank lending more directly, i.e., moratoria on loan payments, public guarantees, and capital relief measures. These measures willbe discussed having in mind their potential drawbacks and the way they can distort banks’ and borrowers’ incentives. (link to the document)