EU Banks Set for More Capital Relief to Keep Loans Flowing
EU Banks Set for More Capital Relief to Keep Loans Flowing
(Bloomberg) -- European banks are set for their fourth round of capital relief from regulators to help them keep loans flowing to companies hit by the spread of the coronavirus.
The European Commission plans to announce a series of measures Tuesday, including relief on how banks calculate a metric called the leverage ratio, or capital as a share of assets, according to people familiar with the matter. Regulators may also allow banks more time to implement an accounting requirement that forces them to set aside money for souring loans upfront, one person said.
The Commission is still reviewing various options and details may change, the people said. A spokesperson for the Commission declined to comment.
Regulators around the world are offering banks unprecedented amounts of relief by allowing them to dip into capital cushions, giving them more time to address deficiencies and encouraging them to take a flexible approach to provisioning for bad loans. Europe has trailed the U.S. and other jurisdictions in reducing the burden of the leverage ratio.
European banks’ regulatory relief:
- March 12 - European Central Bank allows banks to temporarily use capital and liquidity buffers, says it will consider giving banks more time to wind down bad loans and address other deficiencies
- March 20 - ECB gives banks further flexibility in treatment of loans backed by governments and encourages them to avoid making the situation worse by too much upfront provisioning for loans
- April 16 - ECB temporarily lowers capital requirements for the trading arms of banks after heightened volatility on financial markets
The Commission may also decide to allow banks to treat software expenses as investment rather than as cost, said one of the people. The accounting change would mean that IT spending would have less of an impact on banks’ regulatory capital buffers.
So far, the ECB has provided most of the relief in Europe because it could act fastest given it is responsible for day-to-day supervision of major euro-region banks. The ECB can tweak the math behind the leverage ratio for individual banks, but changing banking regulation is the remit of the Commission as the European Union’s executive arm.
Deutsche Bank
The region’s lenders had lobbied for reserves they hold at the ECB to be excluded from the measure of their assets, arguing that such funds aren’t relevant, according to people familiar with the matter.
Deutsche Bank AG said late Sunday that it probably won’t reach a goal of raising its leverage ratio to 4.5% this year “absent regulatory adjustments to the leverage ratio calculation which may increase the banks reported ratio.”
The German lender says it had 134 billion euros ($145 billion) of cash parked primarily at central banks at the end of 2019. Excluding all of that from its assets could increase the leverage ratio by about 0.5 percentage points, according to calculations by Bloomberg News. The metric stood at 4.2% at the end of December, Deutsche Bank filings show.
The leverage ratio will only become a binding constraint in Europe next year, but banks already report the figures and investors consider them an important metric.
The ECB has already encouraged to use flexibility permitted in accounting standards to avoid a spike in provisions for doubtful loans that could choke the flow of new credit. European banks have taken that message on board and are setting aside less funds than U.S. banks have done, Bloomberg reported earlier this month.
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