COVID-19: a stress test of bank regulatory reforms

The bank regulatory framework was completely overhauled at both the international and local level following the 2008–09 global financial crisis. Key changes included the introduction of new principles for liquidity management, increased capital requirements and the widespread introduction of stress-testing. The reforms strengthened the global banking system, but they also had a number of unintended consequences. Among other things, they allowed a degree of Balkanization of bank capital and liquidity rules, creating a patchwork of local-level regulation that has led to uncertainty and inefficiencies. Despite drawbacks, the new system has generally performed well to date during the COVID-19 pandemic, with banks being part of the solution (in terms of mitigating the financial impact of the crisis) rather than the problem. However, to a substantial extent this has been due to unprecedented fiscal and monetary measures undertaken by the authorities. The Financial Stability Board’s 2021 review of the regulatory system’s performance during the pandemic will be critical to future international coherence. To be successful, it must fully explore key questions concerning the system of capital and liquidity buffers, including whether an optimal balance was struck between the use of regulatory protections and the deployment of exceptional economic and financial measures. The review must also address problems that were emerging before the pandemic.