ECB Offers Banks More Capital Relief to Cope With Pandemic

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Banks will be allowed to exclude coins, banknotes and deposits held at central banks when calculating a financial-strength metric known as the leverage ratio until late June next year, the ECB said in a statement on Thursday in Frankfurt.

Based on data from the end of March, the relief would increase banks’ aggregate leverage ratio from 5.36% to about 5.66%, the ECB said.

The coronavirus pandemic “has resulted 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,” the Governing Council said in an opinion laying the ground for the decision.

The option to temporarily relax the leverage ratio during the pandemic was introduced by European Union policy makers earlier this year when they tweaked legislation meant to support credit to companies and households. The ratio measures capital as a share of assets.

The ECB is already allowing banks to dip into their capital buffers and take a flexible approach to soured loans in order to give them the financial resources to swallow losses and keep lending.

A leverage ratio of 3% will become a binding requirement for banks in the European Union by the middle of next year. Lenders already disclose the metric now to give a better picture of their financial strength.