When Covid-19 hit, Basel III reforms paid off
The report found that the banking system would have been more stressed if these reforms had not been implemented and if central banks and regulators had not provided further support 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 essential services,” the report says.
Banks themselves have also proven resilient throughout the pandemic, bolstered by significant increases in their capital and liquidity positions since the adoption of post-crisis reforms, the report notes.
While bank credit default swap (CDS) spreads indicated that banks were under strain in response to the onset of the pandemic, the report noted that no “internationally active bank has failed or has failed. has required significant public sector funding since the onset of the pandemic, although future losses could occur as the pandemic remains ongoing. “
Regulators also found that banks with higher basic Tier 1 capital ratios experienced smaller increases in their CDS spreads.
In addition, the analysis indicates that more heavily capitalized banks showed larger increases in lending to businesses and households than other banks, “which allowed banks to help absorb the shock rather than letting it go. ‘amplify, as they did during the financial crisis, according to the report.
Some banks faced liquidity pressure early in the pandemic, according to the report, noting that the severity of the pressure was largely due to banks’ funding models.
“For example, banks reliant on unsecured wholesale money markets were more likely to have come under pressure as sources of funding dried up and they suffered large drawdowns on lending facilities,” the report says. , while banks with stable deposits “experienced negligible liquidity pressure even at peak stress.
In addition, the review found that strong government support for borrowers “significantly mitigated the impact of the economic contraction on bank capital.”
“Covid-19 reiterates the importance of having a resilient banking system based on global and prudent standards,” said Pablo Hernández de Cos, chairman of the Basel Committee and governor of the Bank of Spain.