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Law360, London (June 10, 2020, 12:49 PM BST) -- A European Parliament committee has waved through changes to the bloc's capital rulebook that are designed to encourage banks to lend to businesses and households during the COVID-19 pandemic.
Updates that will loosen the Capital Requirements Regulation were approved by the economic and monetary affairs committee on Tuesday as lawmakers seek to push lenders to supply credit to the European Union's economy during the crisis.
The rules, introduced in response to the last financial crisis, forced banks to maintain sufficient reserves of capital to allow them to withstand market shocks. But MEPs agreed on Tuesday to changes to the regulation that will mean lenders are not compelled to follow rules on preventing debt pile-ups until 2023.
"MEPs approved new rules to temporarily ensure favorable conditions for banks in order to support credit flows to companies and households and absorb losses, mitigating the severe economic consequences of the COVID-19 pandemic and the enforced confinement," the EU parliament said Tuesday.
The rules, which were adopted with 41 votes for to 16 against, with two MEPs abstaining, will be voted on by the EU Parliament's plenary session on June 19.
The capital regulation, which aims to implement the so-called Basel III global standards in the EU, will compel larger banks to meet a binding leverage ratio of 3% on their balance sheets from January 2022. It is hoped this will prevent excessive debt from piling up in the financial system. 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.
But the EU has said that, in the context of the pandemic, banks can postpone having to follow the rule for a year, until January 2023. This is in line with the Basel Committee on Banking Supervision's decision to push Basel III standards back by one year until 2023 so that banks can focus on keeping themselves afloat during the coronavirus crisis.
Pushing the requirement back will allow banks to increase the amount of funds they would be able to loan, Parliament said.
The package adopted by the committee on Tuesday also includes steps to reduce the amount of money banks have to hold for nonperforming loans if they are guaranteed by national governments.
A bank loan is categorized as nonperforming when a borrower fails to pay installments or interest after more than 90 days. Banks must hold a backstop, the minimum amount they need to set aside to cover losses caused by new loans that turn bad.
--Editing by Ed Harris.
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