Law360, London (March 12, 2020, 4:08 PM GMT) -- The European Central Bank relaxed various capital requirements for European Union banks on Thursday to encourage lending and offset the impact that the coronavirus scare is having on the economy.
The European Central Bank announced plans to ward off the effects of the coronavirus on the economy. (AP)The ECB said it will allow banks to allocate less money to capital buffers than they are required to under the EU's Pillar 2 framework, which ensures that banks have enough cash to address risks.
Banks also will be allowed to use assets that are not classified as common equity Tier 1 — a group reserved for the highest-quality assets, such as shares — to meet their reduced Pillar 2 requirement.
In a further concession, the ECB will allow banks to put less cash into the capital conservation buffer, which ensures that lenders build up their capital holdings outside of times of stress, and the liquidity coverage ratio — which forces them to hold an amount of liquid assets enough to fund cash outflows for 30 days.
The relaxation in capital requirements comes as the global spread of the COVID-19 disease, which first appeared in late 2019 in Wuhan, China, is expected to hurt financial sector profits as it begins to cause consumer and business spending and borrowing to stagnate.
"The coronavirus is proving to be a significant shock to our economies," Andrea Enria, chairman of the ECB's supervisory board, said in a statement Thursday. "Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties. The supervisory measures agreed today aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff."
The central bank also added monetary policy steps to provide banks and borrowers more access to credit if cash circulating in the financial system runs short.
The ECB said it will add to its existing program that provides cheap, long-term loans for banks, known as targeted long-term refinancing operations. This will provide an effective safeguard if there are signs of strain in the money markets or liquidity shortages in the banking system.
The central bank also is adding another net €120 billion in asset purchase under its previous stimulus program to inject cash into the economy.
"These measures will support liquidity and funding conditions for households, businesses and banks and will help to preserve the smooth provision of credit to the real economy," Christine Lagarde, president of the ECB, said Thursday.
The ECB said it is discussing individual measures with banks, such as adjusting deadlines for meeting rules. The authority said its temporary measures will be enhanced as national regulators begin relaxing the countercyclical capital buffer requirements.
The Bank of England reduced the rate of the requirement from 1% to 0% on Wednesday in order to temporarily dissolve the buffer in order to release £190 million for banks to lend to businesses.
Britain's central bank also on Wednesday lowered bank refinancing to 0.25% from 0.75% to encourage spending as investors are steering clear of risky assets since the coronavirus outbreak.
But the ECB said Thursday that it will not change its main interest rates.
Other European regulators have said they will work with banks and financial institutions under their supervision to make sure they can meet their regulatory obligations despite the coronavirus.
--Editing by Alyssa Miller.
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