Financial Regulation and Bank Supervision during a Pandemic

Abstract

Pandemics lead to a sudden decline in the level of economic activities. Lending institutions reduce credit supply to businesses due to fears of rising bad debts during a pandemic. This paper highlights some approach to financial regulation and bank supervision during a pandemic such as the SARS and COVID-19 pandemic. I show that financial regulation during a pandemic can be enhanced by diversifying the financial system, maintaining adequate liquidity in the financial system, stimulating financial institutions to provide more credit, delaying the recognition of significant increase in credit risk, lowering the reference interest rate to encourage more lending, and providing stimulus packages to affected financial institutions in the economy. I also suggest measures to improve bank supervision during a pandemic which include adopting a flexible supervisory framework, modifying bank supervisory examinations, using ad-hoc stress tests, releasing the countercyclical capital buffer to banks, and increase the use of regulatory forbearance. The implication of these approaches to coping with a pandemic is that these measures can help to ensure the survival of small and large businesses and financial institutions who rely on credit from financial institutions. It can also help to preserve jobs and help to reduce the long term damage to the economy caused by the pandemic.