ECB pressed by banks to extend capital relief beyond June

[BRUSSELS] Banks are lobbying the European Central Bank to extend temporary capital relief granted during the pandemic to keep credit flowing to fragile economies, according to people familiar with the matter.

Lenders on the continent have been pressing officials to be allowed to keep excluding deposits held at central banks when calculating their leverage ratio. The exemption, set to expire June 27, effectively makes banks looks stronger and allows them to do more business with existing financial reserves.

The ECB has yet to hold a formal discussion on whether or how to extend the relief measure, yet some officials are open to the idea, said one of the people familiar with the matter.

The ECB and other authorities have given lenders unprecedented regulatory relief during the pandemic to help them absorb losses and keep supplying credit to the economy, though many banks have seen earnings rebound. Both Switzerland and the US allowed leverage ratio relief measures to expire this year.

An ECB spokesman declined to comment.

The leverage ratio is one of two key financial strength metrics for banks. Under new requirements in the second half of the year, banks will need to have a minimum level of 3 per cent, although the largest banks will be subject to surcharges at a later stage. The metric measures capital as a share of assets, without taking account of their riskiness.

For example, Deutsche Bank said its 4.6 per cent leverage ratio at the end of March would fall to 4.2 per cent when including cash held at the ECB. The German lender is targeting a ratio of about 4.5 per cent next year.

German lenders have decided to lobby the European Central Bank for an extension of the relief measure, a spokesman for the German Banking Industry Committee, an umbrella organisation for Germany's five biggest banking lobbies, said in an emailed response to questions. Ending the measure before there's a sustainable economy recovery would entail the risk of cliff effects and may constrain the ability of banks to provide credit, he said.

Banks may also find that an extension is a muted benefit as the ECB has said it would result in "an upward recalibration" of the 3 per cent minimum leverage ratio requirements.

BLOOMBERG