ECB Temporarily Relaxes Capital Requirements To Weather Covid-19

A very expansive monetary policy is necessary to keep interest rates low in all countries, say de ECB

The European Central Bank has decided to allow the lenders it directly supervises in the region, on a temporary basis until June 27, 2021, to exclude certain exposures to the central bank from their leverage ratio. In this way, the institutions will have more room to incur debt since the ECB will not require more capital for it. In fact the ECB will not take into account the liquidity (cash and deposits) banks hold at the central bank when calculating the leverage ratio (Capital/Assets).

The ECB’s banking supervision has taken this step after the Governing Council confirmed there are exceptional circumstances in place due to the impact of the coronavirus pandemic.

In the view of Bankinter’s analysts, the decision is “right” but not a catalyst for banking sector prices.

“It is a transitional change that facilitates capital management until June 2021, but the fundamentals remain unchanged (liquidity, capital and risk). Furthermore, the estimated impact is limited, as the leverage ratio would improve to 5.66% (from 5.36%), according to ECB estimates.”

he Governing Council has expressed a view where it considers that “the situation brought about by the coronavirus pandemic has affected all the Eurozone economies in an unprecedentedly profound way.” It therefore considers that a very expansive monetary policy is necessary to keep interest rates low in all countries. This in return “requires the decisive working of the bank-based monetary policy transmission channel.”