Managing COVID-19's Impact on the Financial Sector

Not even the most extreme risk assessments had predicted the chaos caused by the COVID-19 pandemic. The supply of goods and services has been significantly affected, while demand has been substantially reduced. Authorities of every country have committed to flattening the pandemic curve and must now seek to smooth out the deterioration in economic activity.

In the face of the situation, it is necessary to take measures to address the reduction of household income and mitigate the deterioration of every country's production system. It is important to ensure that households are affected as little as possible, especially the most vulnerable, through policies aimed at limiting layoffs, creating and/or strengthening unemployment and health insurance, temporarily suspending payment of public services, deferring tax obligations and/or reducing fees to companies, among others.

Action must be taken to ensure that economic operators have sufficient liquidity, in order to enable debtors in the financial system to be eligible to receive credits, ensure that financial institutions continue to provide services with due quality and guarantee the proper and ongoing provision of financial services. It is of particular importance to implement transitional adjustments to regulations so as to support debtor performance, especially individuals and SMEs.

First, sufficient liquidity must be made available to the financial system in order to meet short-term demands arising from potential runs or a reduction in revenue streams, as well as to make the liquidity models required by control authorities more flexible.

Central banks could also help by reducing their intervention rates, in addition to reviewing the structure as appropriate, purchasing financial instruments, and proactively offering liquidity lines.

Secondly, in order to maintain continuity in financial flows to households during these hard times, creditor action must be pushed back, allowing them to refinance their debt, including grace periods without deteriorating their credit rating. To that end, authorities must provide financial institutions with the proper authorizations to continue accruing interest for a specified period, as well as allow risk centers and credit bureaus to keep the debtors' scores unchanged so as to avoid shrinking the availability of existing credit quotas. Similarly, governments may suspend countercyclical provisions and go into a de-accumulation phase, while allowing general portfolio provisions to be used to cover individual provisions and/or suspend the establishment of general provisions.

Additionally, to enable financial institutions to adequately manage risk in their operation, the establishment of an emergency response committee should be promoted, together with a business continuity plan to maintain public attention, which establish short- and medium-term action plans to prevent a number of contingencies depending on the level of risk, strengthen the technological infrastructure, improve cybersecurity, increase monitoring capacity, and ensure the operation of digital response channels. Also, entities should be required to take steps to ensure the availability of officials, collaborators or third parties performing critical roles, including household or online work, and, most importantly, to inform consumers of action measures.

Under the current exception scenario, it is important to ensure the financial strength of the system by temporarily reducing capital requirements and portfolio weighting by risk level, in particular that of SMEs, limiting the distribution of profits and forcing the acquisition of additional reserves.

Finally, another potentially useful measure is to facilitate and strengthen the support of each country's deposit guarantee funds, mainly for medium and small businesses, both banking and the cooperative and solidarity sector, which may require assistance with solvency problems and, exceptionally, while being willing to capitalize on some strategic sector companies.

In conclusion, we must increase the financial sector’s resilience to the economic impact of the current health crisis by adjusting the prudential regulation of liquidity, credit, operational and deteriorating risks of its sustainability.