By Huw Jones
LONDON (Reuters) – Banks are calling on European regulators to match the U.S. Federal Reserve’s plan to relax a rule that measures a bank’s capital reserves to promote the flow of cash to businesses hit by the coronavirus crisis.
Earlier this month, the Fed proposed a temporary easing of a supplementary leverage ratio rule that applies to the biggest U.S. banks that have assets of more than $250 billion.
This would allow the U.S. banks to expand their balance sheets by lending more to customers hit by the pandemic, but without busting their leverage ratio cap of 3% of capital to total assets.
Temporarily easing the ratio in Europe would ensure that relief packages from governments and central banks to help the economy recover work well in practice, Gonzalo Gasos, senior director of prudential policy and supervision at the European Banking Federation, an industry body, said.
“The leverage ratio could be an impediment to the flow of liquidity,” Gasos said.
The ratio was toughened up after the global financial crisis a decade ago to act as a “backstop” to a bank’s core capital buffers.
“What we are asking regulators in Europe is whether reserves held at central banks and exposures to government bonds should be part of the leverage ratio,” Gasos said.
“In anticipation that the amount of exposures to central banks and governments could grow, that could put a limit on the capacity of banks’ balance sheets,” Gasos added.
The measures EU authorities have put in place are enough for the economy and banks to withstand the crisis, he said.
“However, having that conceptual programme in place does not necessarily mean it will be implemented easily, so we are now working on the details to make sure that liquidity flows as it was meant to.”
Regulators across Europe are already allowing banks to tap into a capital reserve, known as a counter-cyclical capital buffer, to keep credit flowing. The Bank of England reassured lenders on Monday they could tap any of these buffers to help borrowers during the crisis and will be given sufficient time to replenish them.
The leverage ratio is a measure of a bank’s capital to its assets on a non-risk-weighted basis, and the largest banks face a supplementary or tougher version than their smaller rivals.
Under the Fed’s proposal, U.S. government bonds held by banks, and bank deposits parked at the Fed, are excluded from the leverage ratio calculations until March 31, 2021.
(Reporting by Huw Jones. Editing by Jane Merriman)
