The massive macro-financial shock caused by the pandemic continues to ravage the global economy and has put both banks and borrowers under severe strain. Supervisors find themselves confronted with unprecedented challenges which call for decisive action to ensure that banking systems support the real economy while preserving financial stability. This blog introduces nine joint IMF-World Bank recommendations to help supervisors navigate these uncharted waters and calls for vigilance regarding policy measures taken that are not consistent with international standards. This is critical to prevent the health and economic crisis morphing into a financial crisis.
The role of the bank supervisor has never been so essential.
The banking sector plays a critical role in mitigating the unprecedented macroeconomic and financial shock caused by the pandemic through supporting affected borrowers and maintaining the flow of credit to the real sector while preserving financial stability. The global banking system is on a much stronger footing now than during the 2008 financial crisis due to the implementation of the G20 financial regulatory reforms. Still, as acute liquidity challenges give way to structural solvency problems, defaults on debt will rise and the pressure on the banking system will grow. Further adverse shocks to economic and financial conditions could realize. The lingering uncertainties about the ultimate length and impact of the shocks poses profound challenges to banking supervisors.
The IMF and the World Bank share a long-standing and key strategic partnership to help our member countries preserve financial sector stability and promote financial development. Our joint efforts are more important now than ever.
Banking supervision and regulation is an area in which both organizations have extensive experience. Drawing from insights of IMF-World Bank operations across our universal membership and our joint Financial Sector Assessment Program we have published a joint IMF-World Bank staff position note that sets out nine recommendations which can serve as a guide for banking supervisors to help navigate these uncharted waters.
What have policymakers done?
To provide immediate relief to affected borrowers and maintain adequate liquidity in the financial system, many national authorities have deployed support measures such as debt repayment postponement, stimulus packages, and credit guarantees.
Supervisors have been an integral part of this policy response. Building on the guidance of standard-setting bodies, many supervisory authorities have implemented a wide range of interventions in the financial sector. The measures target utilization of available bank capital and liquidity buffers, provide clarity on…