IMF Issues 7-Step Guidance to Preserve ‘Credibility and Integrity of the Global Financial System’ and Lessen Pandemic Blow

The International Monetary Fund has issued new guidance on how banking industry leaders can help maintain an ailing system amid the coronavirus crisis.

The IMF is urging banks to follow key practices to combat the current economic upheaval that represents “a different kind of shock” than the 2008 global financial crisis.

“Never before have modern economies shut down at the drop of a hat…

Pressure on the banking system is growing and higher defaults on debt are imminent. And many now expect a shock to the financial sector similar in magnitude to the 2008 crisis.”

The international body, which works with 189 countries to secure financial stability, is prompting bank supervisors to combine a number of strategies deployed during natural disasters, operational risk events and bank stress episodes to mitigate the downturn.

7 Guidelines for the Banking System

1. Don’t change the rules.

New initiatives could cause more confusion, so supervisors are being asked to focus on maintaining ongoing operations.

2. Use the buffers.

Proper management should allow banks to manage strains on liquidity and revenue loss from missed loan repayments.

3. Encourage loan modification.

Banks should be proactive in rescheduling their loan portfolio for borrowers hit hard by the temporary shock, utilizing flexible credit risk management.

4. Don’t hide the losses.

Transparency will prevent the crisis from getting even worse.

5. Clarify regulatory treatment of support measures.

Clarifying how banks should work with borrowers, credit guarantees and direct transfers, among other activities, can help with overall transparency.

6. Strengthen communication.

Working remotely during the unprecedented move and keeping everyone at home requires an open dialog and some adjustments, particularly regarding reporting requirements.

7. Coordinate across borders.

The integrity of the global financial system is at risk, requiring broad coordination.

The final measure is pivotal to the health of the banking network at large, according to the IMF, as the strain on the entire global financial system will pressure banking professionals to keep the very fabric of the global network intact.

“Broad coordination among national regulators at the international level is imperative. This crisis will pass eventually, and the effects may take time to dissipate, but preserving the integrity of the international framework will be crucial for the credibility and integrity of the global financial system. International bodies like the Financial Stability Board and the Basel Committee on Banking Supervision are working night and day to do just this.”

Mike Corbat, chief executive officer of Citigroup, the third-largest bank in the US by assets, says banks are walking a “fine line” in terms of strapping saddled customers with looming debt as more people file for unemployment and small business owners struggle to keep their enterprises afloat.

In an interview on March 26th with the Financial Times, Corbat remarked,

“The last thing that we all want to see is?… our consumers, our small businesses and our big businesses come out of this … (with a) precariously bigger or larger position of indebtedness. 

So it’s really … walking that fine line of being as supportive as we can be. But at the same time, not in any way, calling into question the safety and soundness of our institution or of the system.”

Brian Moynihan, CEO of Bank of America, the second-largest bank in the US, pledges to retain staff and support customers. He tells FT that the bank’s goal is to “relieve cash flow difficulties” for its borrowers while acting as a “bridge” that can ease the transition between today’s uncertainty and a post-coronavirus economic reality.

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