ECB to Let Banks Run Lower Capital Levels to Deal With Virus

The European Central Bank will let banks run lower capital ratios as part of measures to keep credit flowing as the coronavirus disrupts the economy.

Banks can fully use certain capital and liquidity buffers, and they will have more leeway in choosing instruments to meet demands for financial strength, the ECB said Thursday. The central bank will also consider “operational flexibility” in implementing bank-specific supervisory measures.

Bloomberg reported earlier that the ECB was planning to let banks dip into their capital buffers.

“The coronavirus is proving to be a significant shock to our economies,” Andrea Enria, chair of the ECB supervisory board, said in a statement. “Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties.”

European policy makers are rushing to provide stimulus and make sure banks continue to provide credit, as the spread of the novel virus wreaks havoc on the economy and threatens to push up bad loans. The ECB’s moves come a day after the Bank of England cut rates and introduced a series of emergency measures, including lower capital requirements and a lending program for smaller companies.

Since the credit crunch, regulators have demanded that banks reduce risk and bolster their financial strength to be able to swallow losses without resorting to taxpayers for a bailout. Those requirements started to plateau this year, leading several banks to promise higher dividends and even plans to repurchase stock from investors battered by the industry’s years of underperformance.

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