ECB Gives Investment Banks Capital Relief With Trading Rules

(Bloomberg) --

The European Central Bank is giving investment banks temporary capital relief on trading activities to help them weather the coronavirus outbreak.

The ECB is allowing lower capital requirements when calculating how much money banks have to set aside for market risks, according to a statement on Thursday. The decision will be reviewed after six months.

Deutsche Bank AG, BNP Paribas SA and Societe Generale SA are among the banks which could gain the most from any leniency on the issue because they run the biggest trading businesses in the euro area.

The ECB has provided unprecedented relief for the continent’s battered finance industry since the coronavirus outbreak, reducing capital buffers so banks can boost funds for lending to European businesses. It has been slower than peers such as the Bank of England in lightening the burden on trading operations of banks, which also play a role in funding the economy.

“This is a very welcome and timely reaction from the ECB, reflecting the very important developments in the market and actions also taken by other authorities,” said Jouni Aaltonen, managing director of prudential regulation at the Association for Financial Markets in Europe, a banking lobby group. “This should help maintain liquidity in the markets at these turbulent times.”

Last month, the ECB freed up 120 billion euros ($130 billion) of capital by allowing banks to dip into some of their buffers and use subordinated debt to help fill a key requirement. The ECB is also giving banks more time to tackle bad loans and remedy other deficiencies.

The ECB said its latest decision is a response to “extraordinary levels of volatility” in financial markets since the outbreak of the virus. In addition to “smoothing pro-cyclicality, the measures aim to maintain banks’ ability to provide market liquidity and to continue market-making activities.”

Bloomberg reported last week that investment banks were pressing the ECB to allow them to strip out some of the recent wild swings in stock and bond prices when calculating the risks their trading operations face.

Banks have lobbied for years to roll back 2008 crisis-era rules designed to make them safer. Now many of those wishes are being granted to give them greater flexibility to deal with the fallout from the pandemic. So far, the ECB has said the relief will be temporary and has also called on banks to do their bit by delaying dividend payouts.

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