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Law360, London (April 17, 2020, 2:26 PM BST ) Financial businesses must plan ahead and consider the impact on liquidity if they decide to dip into their capital buffers to help them continue their activities during the COVID-19 crisis, the Financial Conduct Authority said Friday.
The City watchdog said that banks and other lenders can spend the money they hold in their coffers to continue serving customers and keep themselves afloat during the pandemic. But financial companies should ensure they are managing their financial resources properly and must contact the FCA to discuss their plans if they are considering drawing down a buffer.
"Capital and liquidity buffers are there to be used in times of stress. Firms that have been set buffers can use them to support the continuation of the firm's activities," the FCA said in its statement. "We expect firms to meet [their] responsibility by planning ahead and ensuring the sound management of their financial resources. This means taking appropriate steps to conserve capital and to plan for how to meet potential demands on liquidity."
Lenders are required to hold cash as a bulwark against market stress under the so-called Basel III regulatory framework on bank capital. The rules are among measures taken since the financial crisis to allow banks to absorb losses without collapsing.
The FCA has already said that it will be flexible when regulating how finance companies are using their capital buffers. And central banks have been releasing lenders from the need to pour more money into their capital buffers to allow them to pump this into the economy.
The regulator said on Friday that banks must ensure that payments they make are "prudent" given the market circumstances. Lenders may have to cut back on share buybacks and on paying out for dividends and bonuses, the FCA said.
"We would not expect firms to distribute capital that could credibly be required to absorb losses over the coming period," the watchdog said. "We may contact specific firms in relation to this, as relevant."
And lenders that are struggling during the crisis must leave the market in an orderly way. They must plan how to reduce harm to consumers and the wider market in a "wind-down plan" that takes into account the impact of coronavirus on the market, the FCA said.
--Editing by Rebecca Flanagan.
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