Bank regulators warned against protectionism in pandemic response

Banking regulators will do untold damage to global financial stability if they erect barriers to protect local markets once huge loan losses from the coronavirus crisis begin to hit lenders, the Institute of International Finance has warned.

A new report by the global bank lobbying group praised the co-ordinated regulatory approach in the early phase of the pandemic. But Andrés Portilla, the institute’s head of regulatory affairs, said supervisors must remain “very attentive” to the risks that could stem from more fragmented approaches as the crisis evolves.

He said developments since the 2008 financial crisis meant banks had entered the Covid-19 era with more of their resources trapped in individual jurisdictions, reducing their flexibility to deal with stresses in particular markets.

The US and EU both now require the largest foreign banks to “ringfence” resources for their regional operations. Other countries have also introduced national rules.

“There is a risk that we all have to remain very attentive to . . . as the true economic consequences of the crisis manifest themselves on the financial sector, credit losses, etc . . . there could be a temptation to resort to repositioning ringfencing into protective measures to ensure local financial stability,” Mr Portilla said. “That could undermine global financial stability.”

Andrés Portilla

Supervisors across several jurisdictions, including the EU and US, have encouraged their banks to use their capital to support their economies through the crisis, even if that means eating into the “buffers” they are typically required to maintain.

Last week, the Basel Committee on Banking Supervision said national supervisors would allow “sufficient time” for those buffers to be rebuilt “taking account of economic and market conditions and individual bank circumstances”.

Mr Portilla said that common statement was encouraging, but that history had shown that regulators prioritised national concerns in times of crisis. “In some cases, regulators, policymakers don’t see any alternatives,” he said. “They say ‘I need to protect the local financial stability’.”

The IIF, which consulted roughly 50 banks during its research, also called on regulators to streamline information requests and share information more freely so banks were not overloaded with duplicated demands.

The institute’s report does not address the subject of dividend payouts, which has emerged as the most divisive pandemic issue among global banking supervisors, with US lenders continuing payouts but those in the EU banned from doing so.

Mr Portilla said that the divergence was “not as consequential” as it might have been had the biggest US banks not voluntarily suspended the share buybacks that account for the majority of their capital return to shareholders.

He declined to comment further on the topic, which will return to the spotlight this week when the Federal Reserve gives an eagerly awaited verdict on the biggest banks’ capital return plans for the next 12 months as part of its annual stress-test process.