Europe’s Bank Watchdogs Put Further Relief on Hold Until October

(Bloomberg) --

Europe’s banking regulators plan to wait until the end of the third quarter before deciding whether to grant more relief or start a gradual return to stricter demands, according to people familiar with the matter.

After providing unprecedented flexibility for banks to help keep credit flowing to the economy, euro-area watchdogs on the European Central Bank’s supervisory board now want to see how hard lenders will be hit by the fallout from the virus, said the people, who asked not to be named discussing private conversations. The ECB could still act quickly should the need arise earlier, they said.

A spokeswoman for the ECB declined to comment.

The ECB has allowed banks to dip into capital buffers built up in better times in order to cope with increased demand for credit and to swallow losses on loans borrowers can’t pay back because of the pandemic. After three rounds since mid-March, the central bank has held off on further relief, though lawmakers separately are now reviewing a relaxation of MiFID II, rules which banks have blamed for eroding revenue while adding to costs.

October is the first month of the fourth quarter and there should be more clarity on banks’ bad loans by then. First-quarter earnings reports showed lenders made very different assumptions on how the economy will fare this year when setting aside funds for doubtful loans. Germany’s Bundesbank said this month that credit risk will increasingly have an impact starting in the third quarter.

The ECB has informed supervisors with estimates of how high non-performing loans could rise in individual countries, but national watchdogs still want more granular information on the provisioning and capital levels of individual banks, said the people.

The ECB has also asked banks to hold off making dividend payments until at least October. Its first round of relief in March included postponing the deadline for banks to address certain deficiencies by six months.

‘Very Gradual’

In the U.K., the Bank of England said this month it will alleviate pressure on banks by temporarily making its individual capital requirements a nominal amount rather than a percentage of bank’s risk-weighted assets. That is not a move watchdogs gathered at the ECB are currently planning to follow, said one of the people.

The ECB has said that lenders’ capital requirements for next year will remain stable “unless changes are justified by exceptional circumstances affecting an individual bank.” The ECB said it will take a “pragmatic” approach in its review of the risks banks face and will relay any recommendations to banks in November and December.

While the debate at the ECB on how quickly to push banks to rebuild capital buffers has yet to begin, one official said privately that banks should be given several years to do so.

Andrea Enria, who chairs the ECB’s 32-member supervisory board, has stressed that the buffers are there to be used at a time like this, and that banks will be given ample time to replenish them.

“Once the situation improves, we will not suddenly flip the switch,” he said in an ECB newsletter last week. “We will allow a very gradual return to pre-crisis capital and liquidity levels.”

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