Capital and liquidity relief in response to COVID-19: Implications for the Spanish banks

Capital and liquidity relief in response to COVID-19: Implications for the Spanish banks

Fecha: mayo 2020

Marta Alberni, María Rodríguez and Fernando Rojas

COVID-19, Banca, Colchón de liquidez, Colchón de solvencia

SEFO, Spanish and International Economic & Financial Outlook, V. 9 N.º 3

The economic constraints associated with the COVID-19 crisis have prompted regulatory and supervisory authorities to provide Spanish banks with ‘relief’. In particular, the temporary release of capital and liquidity buffers, flexibility regarding asset impairment losses, and the expansion of eligible assets as collateral for liquidity auctions will have varying implication for the Spanish banking sector.

Abstract: Regulatory and supervisory authorities have adopted temporary measures to shore up banks in advance of the expected rise in defaults and in recognition of their key role in the transmission mechanism for financial aid. Banks will be able to operate below the capital conservation buffer (CCB), the Pillar 2 Guidance, and liquidity coverage ratio. In Spain, the sum of the CCB and average Pillar 2 Guidance would release around 58 billion euros for the Spanish banking system. Regulators have also relaxed collateral measures, such as lowering the minimum size threshold for domestic credit claims from 25,000 euros to zero. This will provide
liquidity to support additional measures, such as public guarantees used to ensure credit flows to SMEs and the self-employed, which is especially important in Spain given that SMEs account for over 99.9% of all ompanies.
Additionally, the ECB’s decision to accept less than investment grade debt is significant given the potential for ratings downgrades and the fact that sovereign debt accounts for approximately 10% of the Spanish banks’ total assets. However, since Spanish banks are predominately retail focused, regulatory loosening that targets market risk and volatility in financial markets will have less of an effect on the industry.

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