ECB relaxes bank capital rules further due to pandemic

The European Central Bank (ECB) said on Thursday, September 17, it was offering additional temporary relief to banks to help them cope with the impact of the coronavirus pandemic, easing requirements on the capital they are required to hold.

The ECB said that banks under its supervision will be able to exclude certain central bank exposures from their leverage ratio until June next year, given the “exceptional circumstances” created by the current pandemic.

The move means that banks do not have to include coins and banknotes, or deposits held at the central bank, in their leverage ratio calculations.

“The situation brought about by the coronavirus pandemic has affected all euro area economies in an unprecedented and profound way,” the ECB said in a statement.

“This situation has resulted in an ongoing need for a high degree of monetary policy accommodation, which in turn requires the undeterred functioning of the bank-based transmission channel of monetary policy.” 

The leverage ratio – which measures a bank’s core capital relative to its total assets – is designed to stop banks from taking on too much risk and is a key yardstick for investors.

Eurozone banks will be required to keep their leverage ratio down to 3% from June 2021, but are already required to disclose their current leverage ratio. 

As fiscal stimulus packages, including multiple nationwide furlough schemes, begin to wind down in the autumn, loan defaults are expected to rise.

The ECB has launched a massive 1.35-trillion-euro ($1.6-trillion) stimulus pandemic bond-buying scheme.

Last week, the ECB governing council decided to hold interest rates at historic lows. – Rappler.com