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ECB poised to extend bank capital relief by nine months

ECB poised to extend bank capital relief by nine months

2 min. 16.06.2021 From our online archive
The exemption effectively makes banks look stronger and allows them to do more business with existing financial reserves
The European Central Bank
The European Central Bank
Photo credit: AFP

The European Central Bank is set to extend a key plank of its pandemic relief measures by nine months to ensure lenders keep supplying credit to the economy, according to people familiar with the matter.

The ECB’s supervisory board plans to allow lenders to continue to exclude deposits held at central banks when calculating their leverage ratio until March next year, said the people, who asked to remain anonymous as the matter isn’t public. The measure still needs approval from the ECB’s Governing Council to take effect, they said.

An ECB spokesman declined to comment. The exemption, which would otherwise expire on June 27, effectively makes banks look stronger and allows them to do more business with existing financial reserves.

The ECB’s stance contrasts with that of its peers in Switzerland and the U.S., which allowed leverage ratio relief measures to expire this year. It highlights the euro area’s stronger reliance on bank loans, rather than capital markets, as a source of corporate financing. The ECB and other authorities have given banks unprecedented regulatory relief during the pandemic to help them absorb losses and keep lending, and by now many institutions have seen earnings rebound.

Monetary Policy

Bloomberg reported last month that banks were lobbying to extend the temporary capital relief.

The leverage ratio relief has helped avoid unintended consequences from the ECB’s pandemic bond-buying program. Bond purchases by the ECB have put more money into the lenders’ accounts at the central bank, which may end up making those lenders look more highly leveraged were they not exempted.

Some European bank regulators are keen to avoid extending the leverage ratio relief beyond March, said the people.

The leverage ratio is one of two key financial strength metrics for banks. Under new requirements in the second half of the year, banks will need to have a minimum level of 3%, although the largest banks will be subject to surcharges at a later stage. The metric measures capital as a share of assets, without taking account of their riskiness.

Deutsche Ratio

For example, Deutsche Bank AG said its 4.6% leverage ratio at the end of March would fall to 4.2% when including cash held at the ECB. The German lender is targeting a ratio of about 4.5% next year.

Separately, the supervisory board will discuss next month whether to lift a cap on bank dividends at the end of September. The ECB has said it will remove its restrictions, which have weighed on banking stocks, if the economy doesn’t deteriorate.

While the discussion on dividends has yet to take place, several European bank regulators expect the cap to be lifted, according to the people familiar with the matter.

Andrea Enria, who chairs the supervisory board, said on Tuesday that he hopes to exit the cap soon.

©2021 Bloomberg L.P.

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