By Huw Jones
LONDON (Reuters) - Easing bank rules is among the "bold and extraordinary" steps needed to beat the coronavirus, but it must be temporary and limited to avoid undermining financial stability after the epidemic has passed, central bankers said on Wednesday.
Regulators are allowing banks to tap capital reserves and take a softer line on provisioning for bad loans to keep credit flowing to companies during national lockdowns and an inevitable recession.
They have also postponed a slew of new rules, raising hopes among banks of a more longer-lasting roll back in regulations.
But Claudio Borio and Fernando Restoy of the Bank for International Settlements (BIS), a global body for central banks, said in a paper on Wednesday that easing the rules too far could backfire by weakening the banking sector's ability to fund the economy in future.
The rules were introduced after a costly financial crisis a decade ago and to preserve their hard-won credibility the current adjustments "should be, and seen to be, temporary", the BIS paper said.
"This sets a limit on how bold and extraordinary the necessary steps can be," the paper said.
Separately, the Financial Stability Board (FSB), which is based at the BIS in Basel, Switzerland, said the depth of the downturn, and the timing and shape of the recovery remained uncertain.
"A global recession seems imminent, with the potential to create lasting damage to global growth," the FSB, which coordinates financial rules for the Group of 20 Economies (G20), said.
Some sectors may face reductions in their activity that cannot be recouped or may be permanent in nature, the FSB said in a report for G20 finance ministers and central banks meeting this week.
"The economic effects of past epidemics provide therefore little guidance for the impact of COVID-19. All this increases uncertainty and makes the confidence of investors and consumers more fragile," it said.
The pandemic has roiled markets and forced most staff at financial firms to work from home, creating potential vulnerabilities, the FSB said.
"Remote and split-site working and limited staff availability may challenge the execution of complex market operations and centralised functions," the FSB said.
Regulators will continue to help banks fund the economy during the crisis in ways that are consistent with maintaining common international standards and preserving fair competition, the FSB said.
"Such actions will not roll back regulatory reforms or compromise the underlying objectives of existing international standards," said the FSB, which is chaired by Federal Reserve Vice Chair Randal Quarles.
When the time comes, authorities will coordinate through the FSB the timely unwinding of the temporary measures, it said.