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Law360, London (September 17, 2020, 1:46 PM BST) -- The eurozone's central bank on Thursday handed banks a fresh round of capital relief in a bid to encourage them to continue lending to customers during the economic fallout from the novel coronavirus crisis.
The European Central Bank said that banks can exclude coins, banknotes and deposits that they hold at central banks when they calculate their so-called leverage ratio. The ratio is the quantity of regulatory capital an institution holds divided by its total assets — a measure of its ability to withstand a financial shock.
The ECB said that the exclusions are expected to raise the aggregate leverage ratio, and therefore the financial health of banks, across the euroarea from 5.36% to approximately 5.66%, based on data from March. The measure, which will apply to 115 banks under the ECB's direct supervision, is intended to give relief to the bloc's largest banks so that they can continue providing credit during the COVID-19 pandemic.
"The situation brought about by the coronavirus pandemic has affected all euro area economies in an unprecedented and profound way," the governing council of the ECB said Thursday. "The condition of exceptional circumstances warranting the temporary exclusion of certain exposures to central banks from the calculation of banks' total exposure measures is met for the euro area as a whole."
EU lawmakers earlier this year gave banking supervisors the power to temporarily relax the ratio during the pandemic, when they waved through "quick fixes" to the Capital Requirements Regulation to support bank lending during the crisis.
The ECB said Thursday that banks will benefit from the relief until June 27, 2021, but it will decide whether it wants to extend the measure beyond this time.
A leverage ratio of 3% is set to become binding on banks on June 28, 2021, but banks are already required to disclose their current ratio.
The central bank has already eased capital requirements for lenders, including allowing banks to allocate less money to their capital buffers than they are required to under the EU's Pillar 2 framework, which ensures that banks have enough cash to deal with risks.
The central bank also said that banks can put less cash into the capital conservation buffer, which ensures that lenders build up their capital holdings outside times of stress. And lenders can also hold fewer assets than required under the liquidity coverage ratio — which forces them to hold sufficient liquid assets to allow cash outflows for 30 days.
The relaxation in capital requirements comes as the global spread of the COVID-19 disease is expected to hit profits in the financial sector as it causes consumer and business spending and borrowing to stagnate.
--Editing by Rebecca Flanagan.
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