In response to the economic and financial impact of COVID-19, the governments of various countries have adopted a number of fiscal and monetary relief measures. Financial supervisory agencies in various countries have also cooperated with the successive release of temporary measures related to the provision of capital in the banking industry so that banks can invest resources in response to the impact of the epidemic. In the context of willingness and capacity to expand assets and liabilities, banks continue to provide credit to enterprises and individuals to mitigate the impact of the epidemic on the real economy and ensure that the banking system can maintain financial and operational risk tolerance.

 

In the face of the impact of the epidemic, various ministries have put forward measures concerning relief and stimulus loans, and the FSC has also asked banks to assist individuals and enterprises affected by the epidemic by, for example, deferring or rescheduling payments on personal financial products and corporate loans, streamlining small business entity loan applications, and the temporary measure of lowering the standard of allowance for bad debts from 1% to 0.5% for project loans handled by domestic banks in accordance with the Central Bank''s accommodation regulations, subject to the requirement that banks benefitting from Central Bank accommodations must, when providing project loans, act in accordance with the principle of controllable risks.

 

In order to further encourage domestic banks to actively participate in various relief policies, continue to play the role of financial intermediary, and provide credit to the market, the FSC, while referring to the measures proposed by the supervisory authorities of various countries, has assessed the current status of the banking industry and, while taking care to pay balanced attention to the need for relief as well as the need to maintain financial resilience, will continue to take the following measures :

1. Delaying implementation of the final reform document of Basel III for one year in accordance with international regulations:

(1) The Basel Committee on Banking Supervision (BCBS) on March 27, 2020 announced a one-year delay of implementation of the capital provision requirements of the Basel III final reform document issued in December 2017, including the standardized approach for credit risk and internal ratings-based approach, market risk and operational risk framework. In view of the fact that Basel III''s final capital reform document will increase banks'' capital requirements and is more complicated, postponing the implementation for one year can relieve pressure on a bank''s human resources and enable the bank to use its capital to support the relief effort and continue to provide credit to the market. The FSC will adjust the implementation schedule of the Basel III final reform document in coordination with BCBS''s response measures, delay implementation by one year, and hopefully synchronize with international standards beginning from 2023.

(2) The Basel III final reform document applies different risk weights (hereinafter referred to as the LTV approach) to the ratio of the loan balance to the loan value of mortgage real estate for "residential real estate exposures." Because the LTV approach can more accurately measure risk, the FSC originally planned to implement it in the third quarter of this year (2020). In order to enable domestic banks to invest internal resources in response to the impact of the epidemic, the implementation of the LTV approach has also been postponed for one year to June 2021 in order to synchronize with implementation of the final reform document of Basel III, and regulations governing the LTV approach will be announced in the second half of this year to facilitate banks'' establishment of the data required for the adoption of the LTV approach, and to enable banks to make necessary preparations.

(3) In order to ensure that domestic banks are able to assist the real economy, the FSC exchanged opinions with domestic systemically important banks (D-SIBs). As a result of these discussions, the requirement for banks to set aside a 2% internal capital buffer will be postponed for one year (i.e. will be implemented over the four years from 2021 to 2024). In addition, the deadline for D-SIBs to announce "response measures for business crises" has been postponed until the end of August 2021.

 

2. Principles for assessing and handling expected credit losses (ECLs) on relief loans and other credit assets:

(1) In accordance with International Financial Reporting Standard No. 9 "Financial Instruments" (IFRS9), banks are required to evaluate ECLs for credit assets such as relief loans that use government guarantees or debt workout arrangements. BCBS and the International Accounting Standards Board (IASB) have successively issued principles for assessment and handling of ECLs, including the following: (a) government-guaranteed and supported relief loans do not necessarily have significant increase in credit risk; and (b) the ECL assessments should take into account past and present conditions, have a reasonable supporting forecast period for assessments of the future economic situation, and give appropriate weight to the long-term economic forecast.

(2) In order to facilitate the consistency of domestic banks'' ECL assessments for relief loans, and to avoid bankers'' concerns about the provision of relief loans, such as accounting treatment or the need for capital charges, the FSC will: (a) refer to the ECL assessment principles of BCBS and IASB; (b) invite the Bankers Association of the ROC to solicit any criticisms that the banking community might have regarding the handling of loan asset classifications or ECL assessments for banks that support government policy by providing COVID-19 relief loans or arranging debt workouts; and (c) develop related recommendations. The FSC will subsequently issue a set of FAQs that domestic banks may use as reference for the handling of related matters.

 

As of the end of March 2020, the average capital adequacy ratio, tier 1 capital ratio, and common equity ratio of domestic banks stood at 14.28%, 12.23%, and 11.39%, respectively, an indication that capital adequacy remained stable. Taking into account the competing needs to manage risks while also taking strong action to implement relief and stimulus measures, the FSC adopted the aforementioned prudential supervision measures for the banking industry, and adopted temporary measures to ease banks'' capital requirements and free up internal resources so that they can respond to the epidemic, continue to provide credit to the market, and play the role of financial intermediary. At the same time, the FSC will continue to urge domestic banks to implement risk management to maintain financial resilience.