ECB eases bank leverage regulations to try to stimulate economy
The European Central Bank has eased regulations on eurozone banks, freeing up to 73 billion euros in capital in a bid to boost lending and prevent the economic crisis triggered by the coronavirus pandemic from unfolding. turns into a credit crisis.
The decision announced by the ECB on Thursday grants lenders additional capital relief, allowing them to increase their lending to governments, businesses and households. This follows a similar, albeit more generous, move by the US Federal Reserve in April.
The leverage ratio rule – which regulates the amount of capital held by banks relative to their assets – was introduced after the 2008 financial crisis in an effort to prevent banks from operating with excessively leveraged balance sheets. It requires eurozone lenders to have capital equal to at least 3% of their total assets by next June.
The change announced by the ECB on Thursday allows lenders to exclude the 2 billion euros of cash and deposits they hold at the central bank from the calculation of their leverage ratio. Eurozone banks hold more than €24.5 billion in total assets.
In a statement, the ECB said the pandemic and its aftermath had “affected all euro area economies in an unprecedented and profound way”, leading to “a continued need for a high degree of policy easing monetary policy, which in turn necessitates the functioning without dissuasion of the banking transmission channel of monetary policy”.
In April, the Fed said U.S. banks could exclude Treasuries they hold from their leverage ratio calculations until the end of March 2021, as well as their deposits with the central bank.
The amount of reserves that eurozone lenders are holding with the bloc’s national central banks has risen sharply since the ECB stepped up its asset purchases in response to the pandemic. The bank’s decision on Thursday will prevent this accumulation of reserves from weighing on banks’ capital needs.
Deutsche Bank, Germany’s biggest lender, said earlier this year that the pandemic had caused further balance sheet growth and meant it would miss its target of reaching a 4.5% leverage ratio. This year. In June, Deutsche Bank had a leverage ratio of 4.2%.
At the end of March, all lenders in the euro zone had an overall leverage ratio of 5.36%, the ECB said, estimating that its latest decision would raise this ratio to 5.66%.
The relaxation of the rule by the ECB will last until June 2021, when the 3% leverage ratio rule will become binding for all banks in the euro zone.
Banks that are considered systemically important have an additional set of regulations that require them to have a minimum amount of so-called total loss-absorbing capital, made up of capital and debt that can be canceled during a crisis. The ECB said its new leverage ratio measure would also apply to these rules.
After the pandemic hit in March, the ECB freed up €120 billion of capital in the 117 eurozone banks it supervises by allowing them to tap into various regulatory buffers, and added €30 billion further by telling them to freeze dividend payments and share buybacks.
Since then, banks have lobbied the ECB to lift its ban on returning capital to shareholders. Yves Mersch, vice-president for supervision at the ECB, said last week that the ECB would review this restriction in December.
“Unless we conclude that banks’ capital projections remain clouded by high uncertainty, we will revert to our usual supervisory practice of assessing projected dividend distributions on a bank-by-bank basis,” Mersch said.