The European Central Bank has relaxed regulations on eurozone banks, freeing up as much as €73bn of capital in an attempt to boost lending and prevent the economic crisis triggered by the coronavirus pandemic from turning into a credit crunch. 

The move announced by the ECB on Thursday grants lenders extra capital relief, enabling them to increase their lending to governments, businesses and households. It follows a similar, albeit more generous, move by the US Federal Reserve in April.

The leverage ratio rule — which regulates the amount of capital banks hold in relation to their assets — was introduced after the 2008 financial crisis in an attempt to prevent banks from operating with excessively indebted balance sheets. It requires eurozone lenders to have capital equal to at least 3 per cent of their total assets by next June.

The change announced by the ECB on Thursday allows lenders to exclude the €2tn of cash and deposits they hold at the central bank from the calculation of their leverage ratio. Eurozone banks hold more than €24.5tn of assets in total.

In a statement, the ECB said that the pandemic and its consequences had “affected all euro area economies in an unprecedented and profound way”, resulting 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”.

In April, the Fed said US banks could exclude Treasuries they own from their leverage ratio calculations until the end of March 2021, as well as their central bank deposits.

The amount of reserves that eurozone lenders hold at the bloc’s national central banks has sharply increased since the ECB stepped up its asset purchases in response to the pandemic. The bank’s ruling on Thursday will prevent this build-up of reserves from weighing on banks’ capital needs.

Deutsche Bank, Germany’s largest lender, said earlier this year that the pandemic had caused extra balance sheet growth and meant it would not hit its target to reach a leverage ratio of 4.5 per cent this year. In June, Deutsche Bank had a leverage ratio of 4.2 per cent.

At the end of March, all eurozone lenders had an aggregate leverage ratio of 5.36 per cent, the ECB said, estimating that its latest decision would increase that to 5.66 per cent. 

The ECB’s relaxation of the rule will last until June 2021, when the 3 per cent leverage ratio rule becomes binding for all eurozone banks.

Banks that are considered systemically important have an extra set of regulations that require them to have a minimum amount of so-called total loss absorbing capital, which is made up of capital and debt that can be written off during a crisis. The ECB said its new leverage ratio measure would also apply to these rules.

After the pandemic hit in March, the ECB freed up €120bn of capital at the 117 eurozone banks it supervises by allowing them to eat into various regulatory buffers, and added a further €30bn by telling them to freeze dividend payments and share buybacks.

Since then, banks have been lobbying the ECB to lift its ban on them returning capital to shareholders. Yves Mersch, vice-chair of supervision at the ECB, said last week that the ECB would review this restriction in December. 

“Unless we conclude that the banks’ capital projections remain clouded by high uncertainty, we will revert to our usual supervisory practice of assessing planned distributions of dividends on a bank-by-bank basis,” Mr Mersch said.


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