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

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)

Bank loans increased considerably in 2020, due to an unprecedented wave of extraordinary measures aimed at supporting bank borrowers. Where constraints posed by public sector deficits were tighter, the response was more focused on contingent/fiscally-neutral measures (e.g. public guarantees and moratoria), which might lead to greater unbalances in the future. Post-Covid recovery can be expected to be selective in nature, both across industries and within. Accordingly, emergency measures cannot simply be dismantled, but rather must be replaced by interventions aimed at smoothing the transition towards a different economic environment. (link to the document)