ECB to let eurozone banks breach key requirements due to coronavirus

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Although markets expected rates to be left on hold, investors were looking out for any signs that interest rates will be lowered.
Although markets expected rates to be left on hold, investors were looking out for any signs that interest rates will be lowered.

The European Central Bank said that eurozone banks will be allowed to fall short of some key capital and cash requirements as lenders grapple with the economic shock of the coronavirus pandemic. 

The announcement came soon after ECB monetary policymakers announced a new stimulus package, marking an unprecedented synchronised action by the central bank’s two arms in a bid to stave off recession in the eurozone. 

“The ECB will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR),” said the ECB’s Banking Supervision division.

The ECB stressed that banks were expected to use the relief to keep credit flowing into the economy, rather than increasing dividends or bonuses. 

Under the measures announced today, banks will also be allowed to account bonds that are not currently counted as capital to meet their requirements, bringing forward a rule change that had already been scheduled for next year. 

“The coronavirus is proving to be a significant shock to our economies,” said Andrea Enria, the ECB’s chief supervisor. “Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties.”

Shortly before the ECB’s announcement, the European banking watchdog said it had postponed this year’s stress test of lenders until 2021, to allow lenders to focus on their businesses during the coronavirus outbreak. 

The European Banking Authority (EBA) said the postponement would help banks prioritise ensuring continuity within key operations.

“”For 2020, the EBA will carry out an additional EU-wide transparency exercise in order to provide updated information on banks’ exposures and asset quality to market participants,” it said in a statement.

The EBA also said that national banking regulators could make “full use” of the flexibility they have to support the banking sector, and that non-essential visits by supervisors could be postponed.