Lobby calls on EU for extra capital easing to help banks lend more

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© Reuters. FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels © Reuters. FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels

By Huw Jones

LONDON (Reuters) – A banking lobby group called on Tuesday for the European Union to further soften a capital measure to ensure banks do not run out of headroom to help companies hit by the coronavirus crisis.

The EU aims to approve a package of capital relief measures for banks by June to keep credit flowing to companies as the economy tumbles into a deep recession.

The Association for Financial Markets in Europe (AFME) said the European Central Bank (ECB) has estimated that such measures will free up 120 billion euros ($ 131 billion) to support 1.8 trillion euros of additional lending.

“The question is are these changes going to be sufficient to furnish banks with enough capacity to provide the support to their customers that is going to be needed in the coming downturn, let alone the recovery?” Michael Lever, head of prudential regulation at AFME, said in a blog post.

“We are not so sure that they will.”

A quarter of the extra lending capacity hinges on banks issuing new debt instruments, which would take some time in current markets, AFME’s Lever added.

Banks also have to include billions of euros in government-backed loans to companies for calculating their leverage ratio, a broad measure of a bank’s capital to assets.

Governments not banks shoulder the risk from the loans, and Lever said consideration should be given to exempting them from the leverage ratio for a limited time to free up lending, a step the Bank of England has already taken.

The EU package already includes a proposal to temporarily exclude reserves banks hold at central banks from the ratio, but Lever said the need to approve the package quickly has led to a reluctance to broaden out the proposals.

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