European Banks Win Major Relief From Leverage Restrictions (1)

April 28, 2020, 12:51 PM

European banks are getting a big break on leverage limits as the region’s policy makers look to keep credit flowing to the economy during the coronavirus pandemic.

A key rule on banks’ indebtedness -- the so-called leverage ratio -- will be relaxed under a European Union proposal announced Tuesday, enabling banks to hold less capital for funds they keep at central banks. Deutsche Bank AG, which had 134 billion euros ($146 billion) in cash primarily at central banks at the end of 2019, stands to be a major beneficiary.

The softening of the rule is part of the latest plan unveiled by the European Commission, the EU’s executive arm, that also would allow banks to save on capital when they invest in software and when they fund infrastructure and small- to medium-sized businesses.

The commission also highlighted flexibility that banks can use with expected loan losses, saying they should consider the longer-term risks to a loan and not just the sudden shock of the pandemic before setting aside provisions.

Read More: EU Banks Set for More Capital Relief to Keep Loans Flowing

Shares in European banks have rallied since Bloomberg News reported the plans Monday. The Eurostoxx Banks index was trading 6% higher at 2:32 p.m., although it remains about 40% down so far this year.

The commission’s actions could help support 450 billion euros in additional lending, according to an EU official. The commission pressed policy makers across the EU to sign off quickly on the proposals in a bid to help the economy.

“What’s important right now is to preserve the financing flow to European companies and households because we need to preserve, to the extent possible, productive capacity of the European economy,” Valdis Dombrovskis, the European Commission’s financial-services chief, said at a news conference.

European policy makers have raced since the outbreak of the coronavirus to ease curbs on the banks to ensure they keep lending to the economy and the credit markets don’t seize up as firms hoard capital. The European Central Bank has freed up hundreds of billions of euros in capital, and authorities have delayed additional capital and collateral restrictions and cut firms additional slack to allow them to work from home.

Still, banks around the world are expecting major losses, with big U.S. banks setting aside more than $25 billion in provisions and HSBC Holdings Plc on Tuesday warning that bad loan charges could hit $11 billion.

Markus Ferber, a German lawmaker who has taken a lead role on financial rules in the European Parliament, said the proposals adjust “many tiny little screws” on the industry that together offer a big help for banks.

“Right now, it is important that banks can provide liquidity quickly and without hassle to companies in need,” Ferber said in an e-mailed statement.

(Updates with bank shares in fifth paragraph, commissioner comments in seventh paragraph.)

To contact the reporters on this story:
Silla Brush in London at sbrush@bloomberg.net;
Steven Arons in Frankfurt at sarons@bloomberg.net;
Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editors responsible for this story:
Ambereen Choudhury at achoudhury@bloomberg.net

Dale Crofts, Marion Dakers

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

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