Boosting banks’ capital levels and liquidity requirements in the wake of the global financial crisis helped the financial world weather the Covid-19 pandemic, according to a new report from the Basel Committee on Banking Supervision.
The banking regulators’ preliminary review of the impact of post-crisis reforms during the pandemic concluded that measures introduced to enhance banks’ resilience helped them absorb the shock — including temporary increases in the cost of liquidity and higher credit risk — while continuing to provide credit to households and businesses, thereby supporting the real economy.
The report found that the banking system would have faced greater stress if those reforms not been implemented and if the central banks and regulators hadn’t provided other supports to the financial system.
“Throughout the unprecedented global economic downturn the banking system has continued to perform its fundamental functions, as banks have continued to provide credit and other critical services,” the report said.
The banks themselves also proved to be resilient throughout the pandemic, bolstered by significant increases in their capital and liquidity positions since the post-crisis reforms were adopted, the report noted.
While banks’ credit default swap (CDS) spreads indicated that banks suffered stress in response to the initial onset of the pandemic, the report noted that no “internationally active bank has failed or required significant public sector funding since the onset of the pandemic, though future losses may emerge as the pandemic remains ongoing.”
The regulators also found that banks with higher common equity tier 1 capital ratios experienced smaller increases in their CDS spreads.
“Moreover, the analysis indicates that more strongly capitalised banks showed greater increases in lending to businesses and households than other banks,” which enabled banks to help absorb the shock rather than amplify it, as they did during the financial crisis, the report said.
Some banks faced liquidity pressure in the early part of the pandemic, the report found, noting that the severity of the pressure was largely driven by banks’ funding models.
“For example, banks reliant on unsecured wholesale money markets were more likely to have experienced pressure as funding sources dried up and they experienced large draws on loan facilities,” the report said, while banks with stable deposits “experienced negligible liquidity pressure even at the peak of the stress.”
Additionally, the review found that extensive government supports to borrowers “significantly dampened the impact of the economic contraction on bank capital.”
“Covid-19 serves as a reminder of the importance of having a resilient banking system underpinned by global and prudent standards,” said Pablo Hernández de Cos, chair of the Basel Committee and governor of the Bank of Spain.