29 May 2020

Banking regulation during theCOVID-19 crisis

The banking sector is expected to play a key role in managing and mitigating the economic shock caused by the Covid-19 crisis. Over the past weeks and months unprecedented measures have been taken to facilitate banks in fulfilling this role and to mitigate the pro-cyclical effects that would result from a strict application of existing regulatory and accounting frameworks.

Regulators have been keen to stress that this prudential flexibility does not imply a similar relaxation of conduct and integrity rules. On the contrary, prudent product approval processes, high AML standards and fraud and cyber-crime prevention continue to be expected of banks. Their boards would be wise to pay regular attention to these topics and remain informed of steps taken in their organisations to address increased risk.

Although recent measures to increase liquidity and stimulate lending may help banks manage immediate demands of the real economy, banks must be mindful of the medium and long-term implications of these measures. They will, for example, be required to restore their capital buffers and may need to retain earnings and to forgo dividends and variable remuneration for some time to come. And uncertainty about how supervisors expect banks to rebuild buffers in due course, may make the sector less willing to make full use of available capital reserves.

In this publication, we highlight the most important measures taken or proposed by both Dutch and European lawmakers and supervisors. We also consider what might be next in terms of banking regulation as the Covid-19 crisis and its economic repercussions continue to unfold.