Reference no: EM133299946

Authorities needed to be flexible and adapt their supervisory priorities and operational modalities for conducting supervision to maintain adequate supervisory intensity. The remote working environment made it more challenging for financial institutions to comply with certain regulatory requirements, some of which needed to be temporarily relaxed. Examples include on-site examinations and certain other supervisory activities previously conducted on-site. Authorities also needed to reprioritise supervisory activities in order to focus on issues emerging from the crisis. Supervisory and regulatory policies may need to adapt and incorporate both short- and longterm considerations. Supervisors and regulators may need to adjust their response over time to address the changing underlying circumstances, including growing solvency risks and changing assessments of the path of recovery. The immediate response to COVID-19 and the deployment of support measures by governments aimed at ensuring business continuity and supporting lending to the real economy. Regulators and supervisors provided operational relief to financial institutions, for example by postponing or refocusing supervisory activities, allowing them to shift resources where they were needed most. In light of the economic uncertainty and to preserve capital in the short-tem, supervisors imposed temporary restrictions on dividends and share repurchases. Whereas the immediate policy responses focused on liquidity and capital, longerterm considerations include the impact of the unwinding of support measures and the effect of these measures on firms' balance sheets, business models and market structure. Regulatory and supervisory authorities may also need to adopt a tailored response with respect to individual firms, for example with respect to those that entered the crisis less resilient. Scenario-based stress tests have helped authorities to adjust their policies effectively. Stress tests and scenario analyses have been important analytical tools for evaluating the impact of COVID-19 on solvency. They can assist authorities in understanding where further policy support may be most needed and effective under different conditions, allowing them to better target and calibrate supervisory responses. Stress testing can also facilitate communication between financial institutions and supervisors as well as external communication. This can help to maintain and restore confidence, reduce uncertainty, and inform firms' risk management. There are several challenges to the design of stress tests and scenario analyses and the interpretation of their results, which is why their disclosure may need to be accompanied by appropriate communication and supervisory action to help prevent adverse outcomes. Recovery and resolution planning have helped improve firms' capabilities, such as the ability to monitor liquidity daily and provide more granular reporting of liquidity positions and distribution within the group to their regulators. Monitoring metrics, both at the micro level and at the macro level, need to be further enhanced. For example, banks' forward-looking liquidity estimates in the context of resolution planning may not fully reflect the actual liquidity distribution within their groups, and hence that distribution may be sub-optimal in a crisis. The pandemic highlighted the need for authorities to continue efforts to ensure credible liquidity arrangements for times of stress and resolution. Although most authorities did not observe concerns about liquidity ring-fencing during the March 2020 market turmoil, some pointed out that ring-fencing remains a risk in future crises. The ongoing work on funding in resolution as 21 well as on the distribution of unallocated total loss-absorbing capacity (TLAC) resources can contribute to strengthening home-host coordination in a crisis. Monitoring risks and the effects of policy measures in the pandemic environment may require a more timely and frequent collection of data than currently captured by regulatory reports. Effective crisis management depends on reliable and timely information in a rapidly evolving environment. Regulators and supervisors need to be able to collect data not currently captured by regulatory reports or that are currently captured only at infrequent intervals to monitor the effectiveness of policy measures (e.g. new loan requests and approvals, delinquencies, uptake of any repayment flexibility programs). Complementing this, market intelligence has been an important mechanism for obtaining information on the effects of policy measures in a timely manner. Despite recent progress, data gaps remain. The rapidly changing pandemic environment highlighted the need for the timely availability of data to enable authorities to assess the implications of economic developments for the financial system and to analyse interconnectedness within the system. Thanks to the strengthening of data collections, policymakers have been able to gain better access to key information to monitor risks. However, gaps remain in terms of identifying and measuring leverage in non-bank financial institutions and interconnectedness between different parts of the financial system. Further information is also needed to support recovery and resolution planning, for instance on the distribution of unallocated TLAC resources across a group and on the profile of investors. Clear communication to the industry and the public can help to support the effectiveness of policy measures. Many supervisory authorities have encouraged banks to use their capital buffers and communicated their intention to allow banks to rebuild buffers gradually. Clear communication can help to prevent stigma effects from individual banks' actions. Similarly, communication about the policy path can help households and firms to plan their own actions and could thereby boost confidence and investment. To strengthen market confidence and reduce uncertainty about the health of the financial system and individual firms, some authorities have disclosed the results of COVID-related stress testing or other analysis. Any such disclosure or communication regarding the health of the financial system must recognise the uncertainty regarding the future macroeconomic scenario. If stress test results are disclosed, authorities should consider accompanying them with a discussion of the policy implications

Question

What are the limitations of the above case study?