key: cord-0913619-3wn75h8v
authors: Bitar, Mohammad; Tarazi, Amine
title: A note on regulatory responses to COVID-19 pandemic: Balancing banks’ solvency and contribution to recovery
date: 2022-04-25
journal: Journal of Financial Stability
DOI: 10.1016/j.jfs.2022.101009
sha: d253b58d3c0fe96c77e0bd7401c602c69b920fe3
doc_id: 913619
cord_uid: 3wn75h8v

We discuss the implications on banks and the economy of prudential regulatory intervention to soften the treatment of non-performing exposures (NPEs) and ease bank capital buffers. We apply these easing measures on a sample of Globally Systemically Important Banks (G-SIBs) and show that these banks can play a constructive role in sustaining economic growth during the COVID-19 pandemic. In addition, an empirical analysis shows that prudential regulatory responses to COVID-19 along with high regulatory capital and low non-performing loans ratios are positively associated with economic growth. Thus, banks should maintain high capital ratios in the medium-term horizon to absorb future losses, as the effect of COVID-19 on the economy might take time to fully materialise.

policy makers to study the potential effect of diseases on economic growth. One notable study is Fan et al. (2018) , who estimates that the expected annual losses from pandemic events is approximately $500 billion, or 0.6 percent of global income, a sum that now appears to be greatly underestimated. Berger and Demirgüç-Kunt (2021) emphasize that the COVID-19 pandemic as the "most unanticipated large and widespread exogenous economic shock of all time". Recent figures show a significant effect of COVID-19 on global economy growth. From job loss to the growing uncertainty and the volatility of the securities markets, the World Economic Outlook (WEO, 2021) report, recently published by IMF, shows that global economic growth is estimated at -3.5 percent in 2020. Advanced countries such as the US, the EU, the UK, and Canada's economic growth is estimated at -4.9% on average. The effect of the pandemic is estimated to be lower in emerging markets and developing economies. While the WEO is projecting a -2.4% economic growth for emerging and developing economies, China's economic growth remains positive and estimated at 2.3% for 2020.

This paper aims to complement the embryonic literature on COVID-19 by discussing the actions undertaken by governments and bank prudential regulators to lessen the economic fallout from the pandemic and maintain the supply of credit. Specifically, we discuss the implications on banks and the economy of softening the treatment of NPEs and easing capital buffers. In addition, we apply these easing measures on a sample of G-SIBs and show that these banks may play a constructive role in sustaining economic growth during the COVID-19 pandemic. An empirical investigation on the effect of prudential regulatory responses on economic growth reinforces this view.

However, it might be counterproductive ifbecause of depleted buffers combined with higher credit riskeconomic and financial distress thwarts the recovery from the COVID-19 shock that was originally non-financial.

The rest of the paper is organized as follows. Section 2 provides statistics on bank compliance with capital requirements using a sample of G-SIBs. Section 3 discusses the implications of prudential regulatory intervention adopted by four governments in response to the COVID-19 pandemic. Section 4 examines the effect of the spread of COVID-19 and prudential regulatory responses on economic growth. Section 5 concludes.

Banks play a key role in financing economic growth and governments COVID-19 policies aim to facilitate banks' role to maintain lending (International Monetary Fund and World Bank, 2020) . These policies include the introduction of repayment moratoria, flexibility in the treatment of non-performing loans, releasing capital buffers, and providing guidance on how to navigate prudential regulation during the COVID-19 period. While these policies aim to facilitate access to finance and stimulate economic growth, they have a short-term nature and are set to expire in summer 2021. Therefore, the post-pandemic economic growth depends on maintaining a delicate balance between two factors: i) the continuity of COVID-19 relief measures related to the release of bank capital buffers and the J o u r n a l P r e -p r o o f lenient treatment of NPEs, and ii) the materialisation of credit risk and its effect on bank solvency once prudential regulators decide to exit these exceptional measures. Yet, controlling for both factors is difficult with the continuous increase in COVID-19 cases and the emergence of new and highly contagious variants.

Overall, maintaining a status quo in the medium-term may lead to a large increase in borrowers' payment deferrals and thus an increase in bank credit risk. A simple calculation gives an idea of this. Table 1 shows the aggregated assets of the 33 G-SIBs operating in 12 countries at the end of 2017. We refer to the Financial Stability Board (FSB) list of G-SIBs and collect the data on bank regulatory capital from the Orbis BankFocus database. We focus on G-SIBs because of their scale and the degree of their importance and interconnectedness within the global and the domestic financial markets. They are important since their failure may affect the stability of the financial system as a whole and the development of the global economy. Total assets amount to $55.2 trillion, of which $24.1 trillion are loans 3 to the economy and $12.5 trillion are securities. Since G-SIBs capital 4 amounts to $4 trillion, it would only take 16.6% (24.1*16.6% = 4) of the G-SIBs loans not being reimbursed to wipe out their entire capital.

To examine whether the rate of 16.6% credit default is possible in the recovery period, we retrieve data on bank credit risk using the same sample reported above. We use two bank-level measures of credit risk, i.e. the impaired loans to gross loans ratio and the bank type of risk-weighted assets (i.e. credit risk, market risk, and operational risk) divided by total risk-weighted assets ratio, and one country-level aggregated measure of credit risk, i.e. the non-performing loans to gross loans ratio. Data on bank-level credit risk is collected from Orbis BankFocus while data on country-level credit risk is collected from the International Monetary Fund's website. Bank-level data covers 33 G-SIBs located in 12 countries and covering the preCOVID-19 period, spanning from 2011 to 2019. Fig.   2A shows that the ratio of impaired loans to gross loans had fallen significantly between 2013 and 2019, from an average of 3.38% to 1.85%. The ratio of non-performing loans to gross loans ratio is showing a very similar pattern but with large disparities between countries. Fig. 2B shows that Italy had a non-performing loans ratio of 18.1% in 2015, higher than the 16.6% figure presented above, and was still significantly above the G-SIBs countries' average in the preCOVID-19 period estimated at 3.44%. In addition, Fig. 4C indicates that in the preCOVID-19 period, bank exposure to credit risk dominated exposures to market risk and operational risk, and accounts for 78.42% of G-SIBs risk-weighted assets, on average. Consequently, it is possible that the capital of some banks will be exhausted if credit risk screening measures are relaxed in the short-term and bank capital buffers are depleted, which may lead to an insolvency problem in the recovery period.

Next, we explore how banking institutions may be in a better position in helping the economy to absorb the impact of the COVID-19 pandemic compared to their position during the 2007/2009 financial crisis by focusing on G-SIBs compliance with Basel III capital reforms. The number of available observations on the components of capital adequacy ratio (CAR) varies between years with 2017 reporting the highest number of available observations across the sample period. Thus, we use 2017 as a base year to compute the capital conservation buffer (CCB), the counter-cyclical buffer (CyB), and the G-SIBs capital surcharge. Fig. 4D show that while the minimum CAR is 8%, G-SIBs prefer to hold CARs well above the minimum standardized level. However, due to the gradual implementation of the capital reforms across countries, the average CAR for G-SIBs varies significantly. CAR increased from 14.23% in 2011 to 17.41% in 2019 ( Fig. 4D) , with the lowest value around 13.91% in Spain and the highest value around 19.61% in Sweden (Table 2, Panel A). The statistics suggest that G-SIBs in Northern European countries along with UK, and American banks are highly capitalized compared to their Southern European and Chinese counterparts. Fig. 4D also shows that more than 66% of CAR is core capital in the form of CET1. Furthermore, Panel A shows that national regulatory authorities require banks to maintain their CCB at 2.5% of risk-weighted assets. The level of banks' CyBs, however, varies substantially across jurisdictions. While most G-SIBs located in the EU have maintained their CyB near or at 0%, other countries such as Canada, Sweden, and China have chosen to maintain their CyB at 2.5% of risk-weighted assets. available to banks in times of economic downturns such as the COVID-19 period; they can be used in the short-term horizon to support the continuous provision of credit to households and businesses instead of using taxpayers' J o u r n a l P r e -p r o o f resources. Nevertheless, the use of these buffers along with a more lenient treatment of NPEs should not undermine banks' solvency in the recovery period. In the next section, we review and discuss the implications on the economy of four measures undertaken by prudential regulators and governments to release bank capital buffers and ease the treatment of NPEs during the COVID-19 pandemic.

We discuss the implications on the economy for four cases of prudential regulatory intervention to ease capital buffers in the US, the EU, the UK, and Canada. We also review the measures undertaken by regulators allowing for a more lenient treatment of NPEs. Prudential regulators can ease capital buffers in three ways. First, they can partially or totally remove the requirements on capital buffers such as in the UK and Canada. Second, they can publicly or privately encourage temporary ease of capital requirements such as in the EU. Finally, they can de-link the use of capital buffers from dividend payments such as in the US. We discuss each of these four cases below.

Under the Fed rule, if the largest American banks' CCB falls below 2.5% of risk-weighted assets plus the required CyB and the G-SIBs capital surcharge, the bank becomes subject to stringent limitations on capital distributions and discretionary bonus payments. These distributions are calculated as a percentage of eligible retained income. Eligible retained income is defined as the average net income for the four calendar quarters preceding the current calendar quarter, net of any distributions. On March 20, 2020, the Fed approved a new revised (interim) rule allowing banks to more gradually limit distributions in the COVID-19 period. The new rule defines eligible retained income as the average of net income for the four quarters preceding the current calendar quarter. This revision will allow banks to build-up their CCB more easily since they no longer need to deduct distributions of previous years from their net income. The revision will also reduce stringent limitations on bank capital distributions and discretionary bonus payments by allowing it to be more gradual.

To examine how the distribution limitations under the new interim rule can be more gradual, we collect quarterly data on net income and retained earnings for five G-SIBs in the United States from the CRSP/Compustat merged database. 5 The data shows that these banks had $22.86 billion, on average of net income for quarter 3, 2018 to quarter 3, 2019 period. For quarter 4, 2019, these banks had $583.31 billion available for distribution ($562.92 billion prior quarter retained earnings and 20.39 billion current quarter net income). 6 We assume that the G-SIBs maintain adequate levels of CyBs and capital surcharges. We also assume that banks distribute 75% of their net income at each quarter. Fig. 5 compares the maximum payout amounts under the new interim rule and the Basel III rule. The graph clearly shows that under the new interim rule, the maximum distribution allowable in quarter 4, 2019 declines more gradually, whereas the previous Basel III rule has a more significant cliff at 2.5%. This revision provides banks with stronger incentives to continue their supply of credit and support economic growth in the shortterm horizon.

Case 2: The EU response to COVID-19 pandemictemporary capital relief

The European Central Bank (ECB) requires banks in member states to follow a more stringent definition of capital compared to banks in the United States and Canada. ECB defines minimum capital requirements' ratio as the sum of Pillar 1 capital and Pillar 2 capital (excluding Pillar 2 Guidance, explained below). In addition, banks are required to add up several capital buffers, including the CCB, the CyB, and the G-SIBs capital surcharge. Pillar 1 capital is the sum of Tier 1 capital and Tier 2 capital. Pillar 2 capital consists of two parts. Pillar 2 Requirements (P2R), which includes risks that are not underestimated or not sufficiently covered by Pillar 1. Pillar 2 Guidance (P2G), which specifies to each bank the adequate level of capital to be maintained in stress situations. The level of adequate capital is calculated based on factors related to adverse scenarios in the ECB's supervisory stress tests. If a bank fails to meet the ECB minimum capital requirements, restrictions may be imposed on the distributions of dividends and bonuses. On March 12, 2020, the ECB announced that banks could temporarily operate below their P2G, the CCB, the CyB, and the G-SIBs capital surcharge. In addition, the ECB will allow banks to partially use additional Tier 1 or Tier 2 instruments that do not qualify as CET1 to meet P2R.

Recall that Table 2 Panel A shows large differences between EU countries capital buffers' requirements.

While banks maintain CCBs at 2.5% of risk-weighted assets in all countries, the level of CyB varies between 0%, in Germany, Italy, Netherlands and Spain, 0.5% in France, and 2.5% in Sweden. For example, Panel B shows that in 2017 the four G-SIBs in France hold more than $95 billion in their CCB, CyB, and G-SIBs capital buffers compared to $9 billion build-up by the one Swedish G-SIB. These differences indicate that releasing buffers, in particular the CyB, may have a very limited and nonhomogeneous effect on supporting banks and stimulating economic activity, given the prevailing low and sometimes non-existent CyBs in some EU countries compared to other countries in the preCOVID-19 period. The ECB estimates that the release of the P2G as well as the less stringent requirements regarding additional Tier 1 capital and Tier 2 capital instruments will allow banks to use around €120 billion of additional CET1 capital to maintain economic activities in the short-term horizon.

Case 3: The UK response to COVID-19 pandemictotal release of CyB J o u r n a l P r e -p r o o f In early January 2020, the UK CyB was at 1% of risk-weighted assets and has been due to reach 2% by December 2020. However, on March 11, 2020, the Financial Policy Committee (FPC) reduced the CyB to 0% to provide additional support to banks in supplying the economy. The FPC decision will be maintained for at least 12 months and any subsequent increase would not take effect until March 2023 at the earliest.

Based on the available data and our calculations, Table 2 Panel B shows that the four G-SIBs in the UK have more than $18.45 billion in their CyB in 2017. With the total release of the CyB, businesses and households should be able to rely on banks to meet their needs for financing to maintain their activities during the COVID-19 distress period. According to the FPC, the release of the CyB will enable all UK banks to provide £190 billion in additional lending to the economy.

In Canada, 7 the CyB was at 2.25% of risk-weighted assets to be effective as at April 30, 2020. However, on

March 13, 2020, the Office of the Superintendent of Financial Institutions (OSFI) reduced the CyB to 1% in response to the current challenges imposed by COVID19. According to the OSFI, releasing the CyB aims to improve the resiliency of the Canadian financial systems and boost lending and economic growth. OSFI committed that any further increase in the buffer will not be made for at least 18 months from the above date.

Based on the available data and our calculations, is the latest year of available data for RBC; we expect that the actual CyB value to be higher in 2019. According to the OSFI, the release of the CyB will enable Canadian banks to provide $300CAD billion in additional lending to the economy in the short-term horizon.

Finally, prudential regulators have taken complementary actions to further increase bank capacity to supply credit. In addition to easing capital buffers, regulators have allowed for a more lenient treatment of NPEs such as NPLs, which could help in reducing the erosion in bank regulatory capital that results from increased provisioning for expected credit losses (Ehrentraud and Zamil, 2020) . Specifically, when counting the 90 days past due, banks can exclude payment moratorium periods granted to borrowers in difficulties due to the COVID-19 pandemic. These borrowers become past due and categorised as NPEs only when the COVID-19 payment deferral period ends and they remain unable to make the rescheduled payments in a timely manner. In addition, when a loan is designated as forborne, the BCBS clarified that borrowers benefitting from COVID-19 deferral or public guaranteed should not be automatically classified as NPEs. However, if distressed loans were to be reverted to NPEs, bank earnings may be reduced, which could negatively affect CET1, the numerator of bank regulatory capital ratio. Moreover, including loans as NPEs increase bank risk weighted assets, the denominator or of bank regulatory capital. In view of the above, the exclusion of COVID-19 payment moratorium from NPEs may increase bank reported regulatory capital ratios in the short-term, while allowing banks to continue making loans. Table 3 provides a brief review of prudential regulatory measures taken by governments in the US, the EU, the UK, and Canada along with the general economic relief plans enacted to alleviate tensions for all economic sectors.

Overall, the easing of capital buffers along with the lenient treatment of NPEs can be effective if included with a general strategic plan that evolves depending on the economic impact of COVID-19 pandemic. This plan should have a short-term horizon and combine transparency and effective market discipline. Stimulating credit supply by allowing banks to use their capital buffers may be short-lived if banks take on more risk with no buffers. In addition, more lenient treatments of NPEs along with the government guarantees to reduce risk-weighted assets should not compromise the "more skin in the game" policy. Such a policy is important to protect bank solvency and increase lenders' ability to discriminate between good and bad credit. Sustaining economic activities during the COVID-19 is important; however, the use of capital buffers along with the complementary actions should not undermine banks' solvency over the medium-term. Otherwise, the COVID-19 economic shock may be replaced with a long recession and severe financial crisis in the recovery period.

The COVID-19 pandemic represents the first major challenge for the Basel III regulatory reforms since the 2007 -2009 financial crisis. In section 2, we show that as a result of these reforms, banks entered the pandemic with strong capital ratios (Borio, 2020) and they were able to mitigate economic shocks (Financial Stability Board, 2020) by argue that resorting to relaxed policy measures that are not consistent with the prudential regulatory standards may provide a relief in the short-term but may accumulate risks in the future. These risks may affect bank solvency, reduce balance sheet transparency, and increase moral hazard, hence, undermine the stability of the financial system and compound the economic impact of COVI-19 pandemic. An empirical investigation, however, shows that emerging markets and developing economies with better economic conditions and larger populations have implemented more COVID-19 policy measures. Finally, Ellis et al. (2021) and Didier et al. (2021) argue that while post-financial crisis regulatory responses have been successful in avoiding crises, these regulations were not defined to deal with a large exogenous shock, such as the COVID-19 pandemic because of the challenges to coordinate different jurisdictions. We add to this emerging literature and explore the effect of COVID-19 spread and COVID-19 prudential regulatory measures on economic growth in developed countries. 8 We construct an initial sample of 41 OECD and partner countries, for which we collect data from multiple sources. Financial and macroeconomic control variables are from the World Bank and the International Monetary We begin by illustrating the unconditional association between GDP per capita and two COVID-19 prudential regulatory measures, i.e. the banking sector policy response index and the financial sector policy response index.

Figs. 6 and 7 plot the mean banking sector policy response index and the mean financial sector policy response index, as reported in Table 4 . The graph shows that GDP per capita exhibits an increasing pattern as a function of increasing policy responses related to the financial sector as a response to the spread of COVID-19. In addition, the difference-in-median tests in Table 4 using both policy response indexes are significant at the 1% level. Hence, countries that have responded with more COVID-19 policy measures have a significantly higher GDP per capita. Table 5 reports descriptive statistics for the 41 OECD countries for the GDP per capita, regulatory capital ratios, credit risk measures, COVID-19 prudential regulatory measures, and additional country-level variables on financial ratios, macroeconomic control variables, and national health control variables. The numbers indicate a large cross-country variation in financial ratios and COVID-19 prudential regulatory measures. For instance, the capital adequacy ratio ranges from a minimum of 14.283% in Chile to 25.818% in Estonia. The banking sector policy response index also varies across countries. While Italy implemented 74 banking related temporary relief measures, Japan only implemented 6. Finally, GDP per capita varies substantially across countries. We find that Switzerland, Ireland, and Luxembourg rank at the top of the GDP per capita measure whereas India, Indonesia, and South Africa rank at the bottom.

INSERT Table 1 in the appendix provides definitions and sources of all variables included in our empirical models.

Our regression model is applied to 41 OECD and partners countries; these countries have responded to the spread of COVID-19 pandemic with various economic and prudential relief packages. Table 6 , Panel A, models 1-2

show that COVID-19 spread is negatively and significantly associated with economic growth at the 1% level.

Increased number of COVID-19 cases may push governments to impose strict rules such as lockdowns and social distancing measures, thus slowing economic activities and employment. As for health measures, model 2 shows that pre-medical conditions such as diabetes, smoking prevalence along with extreme poverty are negatively associated with economic growth. In contrast, life expectancywhich reflects healthy life style, access to health care systems, 9 We collect the data on COVID-19 spread from "Our world in data" website, covering the Jan 31, 2020-Apr 15, 2021 period. and economic statusand the number of available beds in hospitalswhich represents the capacity of hospitals to adapt and endure more daily cases of infectionare positively associated with economic growth. Finally, models 3

to 6 continue to indicate that the spread of COVID-19 pandemic has a negative effect on economic growth even after using alternative measures of COVID-19 spread.

In a second step, we examine the effect of COVID-19 temporary relief measures on economic growth. We exclude 14 countries because they lack data on COVID-19 prudential regulatory measures, thus reducing the sample size substantially to 27 countries and the results should be interpreted with caution. We use the following regression represents bank regulatory characteristics including capital adequacy ratio, tier 1 capital ratio, nonperforming loans ratio. We also control for profitability and liquidity using return on assets and liquid assets to assets ratio. Finally, controls for macroeconomic factors such as domestic credit to private sector as a percentage of GDP and current account as a percentage of GDP. The banking policy response index also categorizes these measures into five categories of governmental responses: i) crisis management, ii) integrity, iii) operational continuity, iv) prudential policies, and v) policies related to supporting borrowers. relief measures dedicated to the banking sector, tier 1 capital ratio, and capital adequacy ratio are significantly positively associated with economic growth. The findings suggest that faster implementation of COVID-19 banking policies and banks with capital components of good quality, i.e. tier 1 capital, play a significant role in maintaining economic growth. Finally, Models 5-6 show that while both the banking sector policy response index and the banking sector regulation measure continue to show a positive effect on economic growth, the nonperforming loan ratio is negatively associated with GDP per capita. Nonperforming loans combined with relaxing the classification and the treatment of NPEs may generate more risks in the medium-term, undermining bank solvency and possibly worsening the economic impact of COVID-19 in the recovery period.

Now, we address concerns about the choice of the main independent variables and potential omitted control variables. We use three alternative proxies for :1) COVID-19 prudential relief measures, i.e. Financial sector policy response index, 2) capital, i.e. Capital to assets ratio, and 3) credit risk, i.e. Non-performing loans to provision ratio.

We also include several additional country-level control variables, i.e. Global systemically important banks dummy (G-SIBs), Unemployment rate, and Urban population to total population. The findings reported in Table 7 and continue to show that while prudential COVID-19 measures and capital ratio are positively associated with economic growth, the nonperforming loans measures have a negative effect on economic growth (Panel A). These findings are also robust and continue to show their expected signs even after the inclusion of additional control variables (Panel B).

Finally, we use data on COVID-19 spread and GDP per capita with various frequencies to further investigate whether the coefficients for the effect of COVID-19 temporary relief measures on economic growth remain unchanged. In Table 8 , we use the log of the cumulative weekly number of confirmed COVID-19 cases, Weekly number of COVID-19 cases (Panel A) and the log of the cumulative weekly number of confirmed COVID-19 deaths, Weekly number of COVID-19 deaths (Panel B). In Table 9 , Panel A, we collect quarterly data on GDP per capita and compute quarterly data on the cumulative quarterly number of COVID-19 cases (and death). In Panel B, we use quarterly data on GDP per capita, the quarterly number of confirmed COVID-19 deaths, and a measure of COVID-19 contagion. COVID-19 contagion is calculated following Ҫolak and Öztekin (2021) as the log of (1 + total number of confirmed deaths per million) in the country.

Weekly COVID-19 data is collected from the European Centre for Disease Prevention and Control website and covers week1, 2020-week 52, 2021 period. 11 Quarterly data on GDP per capita is collected from the OECD data website and covers quarter 1, 2020-quarter 3, 2021. 12 The findings in both tables continue to indicate that both the banking sector regulation and the financial sector policy response index have significantly positive effects on economic growth. In addition, while the Tier 1 capital ratio and the capital adequacy ratio exhibit a positive effect on economic growth, the non-performing loan ratio is negatively associated with economic growth.

What are governments and prudential regulators doing so far in responding to the pandemic? What are the potential implications of prudential regulatory intervention on economic growth? We show that countries have been reacting by implementing various government-led economic relief plans. These plans have a massive scale and cover all economic sectors; however, they are characterized as short-term and only structured to sustain economic activities for few months.

Focusing on the prudential regulatory actions taken by governments to ease bank capital requirements, we document that banks should be able to play a constructive role in maintaining economic activities during the COVID-19 pandemic. Using a sample of Globally Systemically Important Banks (G-SIBs), we document that these banks are well capitalized in the preCOVID-19 period and that various measures, although very different across countries, have been taken to ease capital requirements. While EU countries deferred the application of more stringent capital rules, countries such as the US, the UK, and Canada are temporary relaxing their countercyclical buffers. We hence argue that such measures may not have the same intended effect of stimulating economic growth everywhere. Nevertheless, depending on the level of additional capital buffers maintained in the preCOVID-19 pandemic, releasing these buffers may provide G-SIBs with flexibility in their lending decisions. However, the use of capital buffers along with the complementary actions, such as softening the treatment of non-performing loans, could undermine banks' solvency over the medium-term. Therefore, the COVID-19 economic shock could still possibly lead to a long recession and a severe financial crisis if regulators do not carefully adjust their action depending on short-run developments. An empirical investigation on the effect of prudential regulatory responses, bank capital, and non-performing loans on economic growth supports this view.

At the time of writing this paper, governments and regulators are at the limits of what they can do in terms of recovery. Enacting economic relief plans are welcomed in the short-term but cannot continue indefinitely with no real changes in community behaviour. As we move ahead, we need to fundamentally rethink our societal behaviour and try to understand the "new normal" in our economic activities and financial decisions. It would be hard to believe that we can just "switch on" the economy again and go back to the preCOVID-19 economic conditions; rather, combating the virus requires more strategic actions from governments than just enacting short-term relief packages. These actions should have a medium-term horizon and combine transparency and effective market discipline without compromising prudential regulation. 

Notes: This table presents the level of economic growth, i.e. GDP per capita, as a function of governments' regulatory responses, i.e. the banking sector policy response index and the financial sector policy response index, to COVID-19 spread. † We reports the results of differences-inmedian tests of GDP per capita conditioned on the below and above the median values of the banking sector policy response index and the financial sector policy response index. Table 6 The effect of COVID-19 and prudential regulatory responses on economic growth

Notes: In Panel A, the sample size varies between 30 and 41 OECD and key partners' countries, depending on the available number of observations for the control variables. In panel B, we drop 14 countries because of missing data on the banking sector regulation and the banking sector's policy response index. The final sample consists of 27 OECD and key partners countries. The dependent variable is the natural logarithm of GDP per capita. Variables are defined in Table 1 in the Appendix. *, **, *** denotes statistical significance at the 10% level, 5% level, and 1% level, respectively. 

The effect of COVID-19 and prudential regulatory responses on economic growth: Robustness checks Notes: In Panel A the sample size varies between 30 and 41 OECD and key partners' countries, depending on the available number of observations for the control variables. In panel B, we drop 14 countries because of missing data on the banking sector regulation and the banking sector's policy response index. The final sample consists of 27 OECD and key partners countries. The dependent variable is the natural logarithm of GDP per capita. In panel A, we include the ratio of total capital to assets, the ratio of non-performing loans to provision, and the financial policy response index as alternative measures of capital, credit risk, and prudential regulatory responses to COVID-19. In Panel B, we include three additional control variables: a dummy variable to control for GSIBs, the unemployment rate, and the share of urban population to total population. Variables are defined in Table 1 in the Appendix. *, **, *** denotes statistical significance at the 10% level, 5% level, and 1% level, respectively.

Non-performing loans to provisions ratio -0.007*** (0.000) Return on assets -0.441*** Table 8 The effect of COVID-19 and prudential regulatory responses on economic growth: COVID-19 weekly frequencies

Notes: In both panels, the sample consists of 27 OECD and key partners countries. The dependent variable is the natural logarithm of GDP per capita. We control for bank regulatory capital using two ratios: Tier 1 capital ratio and capital adequacy ratio. We control for credit risk using the non-performing loans to gross loans ratio. Additional bank-level control variables include: return on assets and liquid assets to assets. We control for prudential regulatory responses to COVID-19 using the banking sector regulation and the financial sector policy response index. Additional country-level control variables include: the private sector debt to GDP, the current account to GDP, the weekly number of COVID-19 cases (Panel A), the weekly number of COVID-19 deaths (Panel B). Variables are defined in Table 1 in the Appendix. *, **, *** denotes statistical significance at the 10% level, 5% level, and 1% level, respectively. Table 9 The effect of COVID-19 and prudential regulatory responses on economic growth: Quarterly frequencies Notes: In both panels, the sample consists of 27 OECD and key partners countries. The dependent variable is the natural logarithm of quarterly GDP per capita. We control for bank regulatory capital using two ratios: Tier 1 capital ratio and capital adequacy ratio. We control for credit risk using the non-performing loans to gross loans ratio. Additional bank-level control variables include: return on assets and liquid assets to assets. We control for prudential regulatory responses to COVID-19 using the banking sector regulation and the financial sector policy response index. Additional country-level control variables include: the private sector debt to GDP, the current account to GDP, the quarterly cumulative number of COVID-19 cases and deaths (Panel A), the quarterly number of COVID-19 deaths and COVID-19 contagion (Panel B). Variables are defined in Table 1 in the Appendix. *, **, *** denotes statistical significance at the 10% level, 5% level, and 1% level, respectively. The natural logarithm of the cumulative weekly number of new confirmed deaths cases of COVID-19.

Quarterly of COVID-19 cases The natural logarithm of the cumulative quarterly number of new confirmed cases of COVID-19.

Quarterly of COVID-19 deaths The natural logarithm of the cumulative quarterly number of new confirmed deaths of COVID-19.

Quarterly number of COVID-19 deaths The natural logarithm of the quarterly number of deaths attributed to COVID-19.

As above COVID-19 contagion The natural logarithm of (1 + total number of confirmed deaths per million).

Banking sector regulation The number of days elapsed since the WHO declaration on January 30, 2020, until the first banking sector response measure. 

Variable Definition Data Sources recording the import and export of goods and services, payments of income, and current transfers between residents of a country and non-residents as a percentage of a country GDP. Fig 1A. The number of COVID-19 confirmed cases and deaths per one million in countries with Globally Systemically Important Banks (G SIBs). These countries include Canada, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, and the UK. Source: Our World in Data website. This figure plots the ratio of bank risk exposure to risk-weighted assets. CR/rwa is the risk-weighted assets dedicated to credit risk divided by total risk-weighted assets. MR/rwa is the risk-weighted assets dedicated to market risk divided by total risk-weighted assets. OR/rwa is the risk weighted assets dedicated to operational risk divided by total riskweighted assets. The data is obtained at yearly frequency for 2011 -2019. Source: Orbis BankFocus Fig 2D. This graph plots G-SIBs compliance with Basel III capital ratios. CAR is the bank capital adequacy ratio defined as Tier 1 capital plus Tier 2 capital divided by risk-weighted assets. T1R is the Tier 1 capital divided by risk-weighted assets. T2R is Tier 2 capital divided by risk-weighted assets. CET1 is core capital divided by risk-weighted assets. TETA is the total equity to total assets (unweighted) ratio. The data is obtained at yearly frequency for 2011 -2019. Source: Orbis BankFocus. 

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