Is the COVID-19 Crisis Dire Enough to use our Buffers?

The full impact that the COVID-19 pandemic has had on our world will likely only truly be understood once we’re past it – but it shouldn’t stop us from gathering the learnings we have now and adapting the best we can. Recently, the European Banking Authority published a paper entitled “The EU Banking Sector: First Insights into the Covid-19 Impacts” to shed some light on the ever-evolving situation.

So, what are our main takeaways from this report?

Grey Areas

There seems to be some debate regarding the usage of countercyclical buffers. There is indecision as to when and if more money will be infused into this situation to aid it or not. As of now, only the equivalent of 0.2% of RWA on average in the EU has been released. Some are arguing now is the time to release more of the buffer. This type of situation is, after all, precisely the kind of crisis that we have these buffers for. Others are more cautious and conservative in their views, stating that because we don’t know how long this crisis will last, it’s better to hold off on using more of these buffers until we absolutely have to. Meanwhile, as this debate rages on, all over Europe, non-performing loans are beginning to pile up, and banks are feeling the pressure.

To help weather the crisis, provisions have been granted, and leeway has been given to banks regarding RWA margins to help free-up capital and keep the economy humming along – which has helped quite a bit. However, the specifics surrounding these rules are vague. It seems there hasn’t been a standard guide with concrete numbers, but rather it varies supervisor to supervisor. This has left banks confused as to how long these measures will be valid, exactly how much wiggle room they are being granted on weighting these assets, how can you prove that COVID-19 has had a direct impact on a specific asset, and is it even necessary to prove? All of this uncertainty has, in some cases, stopped the banks from taking advantage of these provisions altogether, thus severely mitigating the success of the measures. Indeed, these Pillar II Guidance issues we feel could use an EU-wide recommendation, a more specific set of guidelines instead of it being subject to interpretation by individual supervisors.

The Good News

Although this crisis has undoubtedly been a challenge to meet, there are some very positive aspects that are important to address.

First off, this pandemic has definitely proved that post-2008 financial crisis regulations have worked. We’ve gone into the COVID-19 crisis over-all in better shape than the last crisis and, as a result, are better equipped to deal with the stress. The larger capital and liquidity buffers have proven to be extremely valuable in building a more crisis-resistant economy.

Secondly, even though at first all these additional reporting requests were complicated for banks to accommodate, they have adapted. Not only have these new extra reports now become routine in many cases, but they have also caused banks to work more closely with and become more aligned with supervisors.

We’ve been helping our clients face and thrive in this crisis by doing an in-depth analysis of their landscapes and helping them with high-level, top-down ideas and tools so they can best manage everything from their data to how to ensure they’re making the best possible use of these somewhat gray-area COVID measures. If you’re curious about how we can help you or have any further questions don’t hesitate to reach out. As always, thanks for reading and stay safe out there!


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