'The good thing is that banks are well capitalized': IMF Head of Banking

IMF Head of Banking Tobias Adrian joins Yahoo Finance’s On The Move panel to weigh in on how banks are faring amid the coronavirus pandemic.

Video Transcript

ADAM SHAPIRO: Well, we want to bring in Tobias Adrian. He is the head of banking at the IMF. And this morning, sir, you wrote that, quote, "Pressure on the banking system is growing, and higher defaults on debt are imminent." You have recommendations for everybody, among which is to encourage loan modification. Are banks worldwide really going to go in and give loan modification to their borrowers who are now in a crisis situation? What would that look like?

TOBIAS ADRIAN: Yeah, absolutely. So the good thing is that banks are well-capitalized. Regulators around the world learned from the 2008 crisis that the banking system has to have a lot of capital and a lot of liquidity. And so the banks are in very good shape today.

This crisis is expected to be a temporary crisis. So the banks are expected to modify loans. So, for example, take your gym around the corner, right? Members might not go to the gym for three month or six months or nine months, but they are expected to come back after some time. And at that point, the gym will be able to make payments to the banks.

And so a loan modification basically says that the bank expects a temporary restructuring of the loan that allows its client to do less payments. But at the end of this episode, they would come back and make normal payments. So banks would be able to withstand that without any problem.

BRIAN CHEUNG: Hey, Tobias, it's Brian Cheung here. So I want to ask about capital. It seems like that was the main issue in 2008, when banks simply didn't have enough capital and needed to get those bailouts. I'm wondering, from your perspective-- there's been talk about bank capital largely being better around the world than it was in 2008, but that still banks can do things like suspend share repurchases, which in the US they already have done. Then you're hearing some calls for like the Bank of International Settlements just saying, maybe we should have a global freeze on dividends as well. I noticed that wasn't part of the recommendations that you had, but curious to get your thoughts on a proposal like that.

TOBIAS ADRIAN: Well, I'm very supportive of that proposal. In fact, as you mentioned, in the US, banks have already said that they are going to stop dividend payments and repurchases of their shares, and that allows them to accumulate more capital so that they can better withstand any adverse shocks. So that's a very good thing from a banking stability point of view.

As you point out, the banks have more capital and higher quality capital. So they have a lot of high-quality, tier-one equity capital, and in shocks like the current shock, they are expected to run down some of that capital buffer, because on the asset side of the balance sheet, there will be some non-performing loans, but banks are well set to withstand that kind of shock.

BRIAN CHEUNG: Tobias, there's kind of a balancing act here, where regulators have to decide, how much do you change maybe even the regulatory structure to allow banks to tap into their liquidity or capital buffers to lend to support the economy in a really trying time as this, but not lose them to the point where the bank becomes weak itself to the point where it could actually become systemic if it ends up failing. Where's the line there? You said don't loosen any of the rules in the recommendations, but you have the Fed that have seen some calls to maybe loosen the liquidity coverage ratio, a lot of these kind of inside baseball regulations. Where do you find that balance to, hey, you should be lending, but also make sure that you're safe?

TOBIAS ADRIAN: So the rules are designed to deal with this shock. So when the Fed says, use the capital, use the liquidity that is in the banks, that is within the set of rules. So the rules say you have a stock of capital that you should accumulate in good times, but then, in bad times, you can use some of that capital.

So you don't want an undercapitalized banking system, so you don't want to use up all of your capital, but you do want to use up some of that capital. So some of that is referred to as the capital conservation buffer, and that's exactly the kind of buffer that you are expected to run down in times of crisis like we have today. Similarly, on liquidity, the liquidity coverage is expected to run down in times of crisis such as today. So that's well within the rules as they are written.

ADAM SHAPIRO: All right. We appreciate your being here, Tobias Adrian, the IMF's head of banking.