ECB to give banks 70b euros capital relief with extension

BRUSSELS (BLOOMBERG) – The European Central Bank said it will grant lenders about 70 billion euros (S$112 billion) of capital relief by extending a measure designed to help them keep supplying credit to the pandemic-struck economy.

The ECB will allow lenders to continue to exclude deposits held at central banks when calculating their leverage ratio for nine months until the end of March next year, according to a statement from the ECB Friday. The measure boosts the ratio of the 39 banks who have used it by 0.7 percentage point on average.

Bloomberg reported on Wednesday that the ECB was set to extend the relief. 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 some peers, notably 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.

Still, the ECB said banks will have to tweak their math in order to maintain the “resilience” provided by the leverage ratio. The relief will only apply to central bank exposures that have built up since the end of 2019, shortly before the pandemic started.

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, Bloomberg reported earlier this week, citing people familiar with the matter.

The U.S. Federal Reserve let its broader leverage ratio relief measures lapse at the end of March, while saying that it would consider modifying the metric.

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The leverage ratio is one of two key financial strength metrics for banks. Starting June 28, banks will need to have a minimum level of 3 per cent, although that figure will rise slightly for individual banks that tap the ECB’s relief.

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.

The relief would give a particular benefit to banks in France, Germany and the Netherlands, which tend to have more central bank deposits than those in southern Europe, ING analyst Suvi Platerink Kosonen wrote in a note after the Bloomberg report earlier this week.

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