To counter the economic effects of Covid-19, Italian and German banks have drawn up a document highlighting ways for financial banks across Europe to mitigate the risk of further loss.
Co-authored by the two financial institutions – Italian Banking Association (ABI) and the German Banking Industry Committee (GBIC) – the whitepaper calls for first and second level regulatory measures and adoption of more flexible provisions in the light of the aftereffects of the pandemic.
Some of the solutions mainly concern banks’ crisis management subject to national oversight and the role of national deposit guarantee schemes, the search for an approach to managing non-performing loans (NPLs) that counteracts pro-cyclical effects, and a balanced implementation in the EU of the Basel III finalization regulatory package.
With regard to the Basel III rules, ABI and GBIC said that until the impact of the health crisis on the financial sector is fully reversed, the legislative process for implementing the new rules by the European Union should be temporary suspended. Outlining the aim of this, the document said, it would avoid negative reactions on the capital markets and eliminate the risk of a rushed Basel III reform which might potentially restrict lending to businesses.
Where NPLs are concerned, ABI and GBIC note that the current regulatory approach was not developed with the pandemic in mind and must, therefore, be reconsidered. It proposed a temporary freeze on the timeline regarding loan provisions granted as of 26 April 2019 and on supervisory expectations to avoid unintended consequences and pro-cyclical effects.
The two institutions also suggested that a crisis management framework must be developed for less significant banks. Alongside, they urged for an enhanced role of national deposit guarantee schemes in safeguarding financial stability.
The dossier highlighted that the current context begs for these reforms so that the European banking sector’s ability to fund the real economy doesn’t decrease in the short and medium-term.
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