Meeting Minutes for INTOSAI WGFMRR Spring 2020 Member Meeting

May 12, 2020

Speaker Discussions

Below are summaries of statements made by representatives from the Financial Stability Board (FSB); Basel Committee on Banking Supervision (BCBS); U.S. Government Accountability Office (GAO); and the Office of the Auditor General of Canada (OAG).

FSB COVID-10 response update

The pandemic represents a major shock and test of financial system. The first phase of the economic impact was liquidity, which was addressed through unprecedented policy measures. The second phase of the economic impact is solvency—high unemployment, less economic activity, which will lead to indebtedness and insolvency, and further corrupt the system. In the pandemic, the financial system has two challenges—maintain the system and manage risks. The financial system is more prepared to manage shock due to G20 reforms. While the pandemic created significant turbulence in the market-based finance system, the banking system has been relatively stable.

Central banks have taken unprecedented actions, as noted in FSB’s recent report. FSB is supporting international cooperation in three ways: (1) sharing information with other Standard Setting Bodies by collecting information from members and sharing it with other members and regional consultancy groups; (2) examining key nodes in the financial system—such as how markets manage liquidity risks, and large outflows from Exchange-Traded Funds—to assess resilience in the financial system, solvency issues with nonfinancial corporate entities, and sources of counter-cyclicality that may be exacerbating instability in the markets; and (3) analyzing policy responses taken by members to respond to the pandemic using FSB’s 5 principles, such as reducing regulatory burden. FSB wants to make sure that countries do not weaken their previous reforms. Currently, FSB is assessing effectiveness to ensure members are taking appropriate actions, and plans to report back to its members in July.

BCBS COVID-19 response update

Basel Committee on Banking Supervision is global standard setter for global banking supervision and coordination among regulators, specifically focused on banks. It has 28 jurisdictions and 45 members. BCBS coordinates with many international organizations and accounting standard setters. Although not a standard setter in the area of economic responses to pandemics, BCBS is very interested in the response because of the pandemic’s impact on banking. The committee’s activities in response to the pandemic has focused on three areas: practical decisions, prudential issues, accounting and auditing. BCBS’s reaction to COVID-19 has focused on three areas: (1) practical decisions, (2) prudential issues, and (3) expected credit losses accounting and auditing.

• For practical decisions, BCBS started virtual meetings about operational continuity amongst members.
• For prudential issues, BCBS focused on solvency, where it conducted seven actions as follows:(1) delayed implementation of prudential standards to not overburden banks; (2) convinced markets that it’s ok to use previously established capital buffers; (3) delayed data collection to reduce burden; (4) ensured that institutions understood that support measures will affect risks; (5) examined longer transition periods for implementation of regulations; (6) conducted information sharing among members; and (7) targeted outreach to stakeholders such as standard setting bodies and banks.
• BCBS is also focused on accounting issues, particularly related to expected credit loss and its recently changed standard. BCBS and the Financial Accounting Standards Board changed its expected credit loss standard so that banks have to value assets according to forward-looking information. This means that they have to account for future information on economy and clients. BCSB has issued a question and answer document on the new standard and expect institutions to comply with the standard and issued other guidance.

Macroeconomic response in the United States (GAO)

The economic response to the pandemic by the United States Federal Government focuses on increasing money in the financial system. Congress authorized an economic stimulus of about $2.5 trillion and the Department of the Treasury and Federal Reserve have conducted over $2 trillion in asset purchases. Realistically, businesses have significant expenses and loans from the government will need to be repaid, which could weaken future profits. At a future time, firms may decide that they are more comfortable shutting down than going into debt, so the government may need to issue grants instead of loans, which causes other significant issues.

Economic indicators (GAO)

GAO has a mandate to report to Congress on the implementation of the act and economic effects of the pandemic. GAO has put together some indicators of economic impacts looking at labor market stress through unemployment insurance claims; employment to pollution ratios; household financial stress; spreads on investment grade corporate bonds; small business health indexes including underwriting on small business loans; and spreads on municipal debt.

To understand economic solvency GAO is focused on household debt, business exits from the economy, and state and local government solvency. Prior to the pandemic household debt was already above $10 trillion in the United States. Through the pandemic household debt has worsened. Household debt is a significant economic issue. In addition, business exits due closures and bankruptcies means permanent loss of capital. Lastly, state and local budgets are incurring significant expenses on health care side, and decreased spending on the revenue side. These issues create additional challenges to the financial solvency of states because they have a balanced budget rule.

Shape of recovery (OAG)

At the beginning of the pandemic, many experts thought the recovery would be a V-shaped curve. However, now it appears that the recovery will more closely resemble a U-shaped curve that denotes an elongated recovery period, or a W-shaped curve which denotes increased economic activity followed by second wave of economic decrease until vaccine is available. The crisis will have a significant impact on financial system, but previous reforms lessen the impact. However, countries still have an unsure path ahead, and some actors will be in a fragile state, which could be exacerbated by other issues such as climate change.

 

Working Group Member Updates

The SAIs provided updates on the impacts of COVID-19 on their countries and their institutions’ response. The summary below is based on updates from the following Working Group members on their respective national responses and related SAI efforts: Brazil, Canada, China, European Court of Auditors, Finland, France, Germany, Italy, Mexico, Poland, Qatar, Saudi Arabia, Sweden, The Netherlands, and the United States. If desired, members can provide written updates to [email protected].

SAIs noted that the COVID-19 pandemic has affected their work and how they complete it. Nearly all SAIs stated that they have been tasked with auditing their governments’ response to the pandemic. Specifically, most audit work discussed will focus on health and economic impacts and government responses in those areas. Some SAIs are conducting their audit work while the government agencies are conducting their pandemic responses, while other SAIs are waiting until after the agencies complete their activities. Internally, many SAIs responded to the pandemic by creating emergency teams to ensure the safety of their workforce. Primarily, SAIs are teleworking, though some SAIs have recently returned to their offices per their governments’ instructions.

Many SAIs stated that their countries’ central banks pursued rapid action in response to the economic impacts of COVID-19. Central bank activities primarily focused on increasing or creating special lending authorities to assist businesses and citizens. Examples of these efforts included creating small business guaranteed and low-interest loan programs, deferment of existing loan payments, asset purchase, and extending tax filing deadlines.