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Banks Catch a Break With ECB Easing Post-Crisis Demands

The central bank will also consider “operational flexibility” in implementing bank-specific supervisory measures.

Banks Catch a Break With ECB Easing Post-Crisis Demands
A Eurosystem monetary authority sign stands outside the European Central Bank (ECB) headquarters ahead of the central bank’s rate decision news conference in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)  

(Bloomberg) -- The European Central Bank freed banks to put some of their financial cushions to work, a key plank in its effort to counter the economic damage from the coronavirus.

Lenders will be permitted temporarily to operate with less capital than the watchdog usually demands and also use types of subordinated debt to help meet their requirements, the ECB said Thursday, enacting measures the banks had sought. The central bank’s other steps to pump more money into the economy included more asset purchases and some loans at negative interest rates.

Banks Catch a Break With ECB Easing Post-Crisis Demands

“The coronavirus is proving to be a significant shock to our economies,” Andrea Enria, chair of the ECB supervisory board, said in a statement. “Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties.”

European policy makers are rushing to provide stimulus and make sure banks continue to provide credit, as the spread of the novel virus wreaks havoc on the economy and threatens to push up bad loans. The ECB’s moves come a day after the Bank of England cut rates and introduced a series of emergency measures, including lower capital requirements and a lending program for smaller companies.

“These are a sensible series of measures which will ensure European banks can continue to support their customers,” said Michael Lever, head of prudential regulation at the Association for Financial Markets in Europe, which lobbies on behalf of large lenders. “Banks hold capital buffers for contingencies such as the major disruption to economic activity that we are now experiencing as a result of coronavirus.”

Still, the measures failed to halt a slide in stock markets after the U.S. last night banned travel from much of Europe. The Stoxx Europe 600 Index plummeted as much as 11.7%, the most on record, led by travel stocks, insurers and banks.

Bloomberg reported earlier that the ECB was planning to let banks dip into their capital buffers.

The ECB said it is discussing individual measures with banks that would grant them flexibility in meeting certain deadlines. While the central bank said it will ensure the “overall prudential soundness” of banks, it cited the following possibilities:

  • Rescheduling inspections at banks’ premises
  • Giving banks more time to address findings from inspections and investigations of the models they use to assess risk
  • Using the flexibility built into plans for individual banks to tackle bad loans
  • Extending deadlines for certain non-critical supervisory measures and data requests

The ECB said that despite its temporary relief, banks should continue to apply “sound” underwriting standards and pursue “adequate” policies for identifying bad loans and guarding against their risk. The central bank also said it wants to see lenders conduct “solid capital and liquidity planning and robust risk management.”

The European Banking Authority, which coordinates banking regulation across the region, also signaled action to lighten the burden on lenders. Supervisors will be flexible in how they scrutinize non-performing loans and are open to discussions with banks about how to handle credit that turns sour, it said in a statement from Paris.

The EBA also postponed its test of how banks would fair in hypothetical economic stress to 2021 to allow the lenders to focus on responding the virus.

Banks Catch a Break With ECB Easing Post-Crisis Demands

“The quick nature of the supervisory measures will allow banks to help clients with liquidity bottlenecks,” said Hans-Walter Peters, who leads the Association of German Banks. “The supervisor is showing the flexibility needed for times of crisis. The delay of the stress tests is also an obvious and sensible move.”

Since the credit crunch, regulators have demanded that banks reduce risk and bolster their financial strength to be able to swallow losses without resorting to taxpayers for a bailout. Those requirements started to plateau this year, leading several banks to promise higher dividends and even plans to repurchase stock from investors battered by the industry’s years of underperformance.

The ECB said it expects banks to use the positive effects coming from its capital measures to support the economy rather than increase investor dividends or staff bonuses.

“It is a strong response,” said Marco Troiano, an analyst at Scope Ratings. “The priority is avoiding that the liquidity crunch turns into widespread defaults.”

--With assistance from Silla Brush and Alexander Weber.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, James Hertling

©2020 Bloomberg L.P.

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