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Nicolas Véron, senior fellow at Bruegel, in Brussels, and at the Peterson Institute for International Economics in Washington DC, long a friend of the CSFI, had published a blog as an antidote to bank lobbying to relax both accounting standards and capital requirements: https://www.piie.com/blogs/realtime-economic-issues-watch/banks-covid-19-turmoil-capital-relief-welcome-supervisory
Véron argued that regulators “should ignore the bankers’ admonishments. There is no perfect accounting thermometer for credit risk in banks’ loan books but breaking the current thermometer in the midst of a crisis would do more harm than good.”
The accounting standards in question are IFRS 9 (in force for the past couple of years in Europe and elsewhere) and ASU 2016-13, which is only just being implemented in the US. The new standards work on an expected credit loss model. Some losses are provided for at inception, and there is more timely recognition of worsening expected losses – triggered if credit risk increases significantly.
As Véron points out, banks were never enthusiastic about having to book losses earlier. He opposed moves by US bank regulators to delay implementation of the standard. The important point he stresses is that other regulatory reforms, notably Basel III, have forced banks to build up capital buffers, which can now serve their purpose of absorbing recession-induced losses. I agree with him.
The actions taken in the past few days by regulators, forcing (or leaning on) banks to suspend dividends and share buybacks and cut cash bonuses, will further bolster capital. John Cronin, financials analyst at Goodbody Stockbrokers, has estimated that cancelling the payment of final dividends adds between 33 and 78 basis points to a key capital measure (common equity tier 1 as a percentage of risk-weighted assets), as reported by the five biggest UK-quoted banks at the end of 2019. RBS, for instance, goes up to nearly 17% – nearly four times the minimum, with various other buffers taking the pre-coronavirus requirement to 10.7%.