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ECB poised to extend bank capital relief by nine months


The European Central Bank (ECB) is set to extend a key plank of its pandemic relief measures by nine months to ensure lenders keep supplying credit to the economy, according to Bloomberg.

The ECB’s supervisory board plans to allow lenders to continue to exclude deposits held at Central Banks when calculating their leverage ratio until March next year. The measure still needs approval from the ECB’s Governing Council to take effect said by individuals who asked to remain anonymous as the matter isn’t public. 

An ECB spokesman declined to comment. 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 its peers 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.

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, according to the anonymous source.

The leverage ratio is one of two key financial strength metrics for banks. Under new requirements in the second half of the year, banks will need to have a minimum level of 3%, although 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 supervisory board will discuss next month whether to lift a cap on bank dividends at the end of September. The ECB has said it will remove its restrictions, which have weighed on banking stocks if the economy doesn’t deteriorate.

While the discussion on dividends has yet to take place, several European bank regulators expect the cap to be lifted, according to the people familiar with the matter.