Brussels has offered banks temporary capital relief that it said could boost lending by up to €450bn this year, arguing the economic damage wrought by the coronavirus crisis justified a “targeted” easing of regulations introduced after the 2008 financial crash.
The announcement came as the results of a European Central Bank survey of 144 lenders published on Tuesday showed that demand for loans from European businesses has surged since the coronavirus pandemic started, while banks have moderately tightened their lending criteria.
The European Commission said the bank rule changes would improve the transmission of central bank monetary policy and allow the economy to reap the full benefit of government schemes to keep credit flowing.
Banks’ balance sheets are coming under strain from both higher demand for loans as well as an expected rise in customer defaults because of the deep recession expected this year.
Governments and central banks have sought to avert a credit crunch by providing state guarantees for vast amounts of loans to struggling borrowers, while also supporting the banking system with cheap loans and reduced capital requirements.
The latest proposals by Brussels come on top of more than $500bn in capital relief that financial regulators around the world — including the ECB, Bank of England and US Federal Reserve — have already provided to banks to help them cope with the strain of the Covid-19 pandemic, according to FT research.
The commission’s plans, which require approval from governments and the European Parliament, include delaying the full implementation of accounting standards that could erode banks’ capital, as well as a lighter regulatory treatment of government-guaranteed loans. The introduction of an additional capital rule for the largest banks would be postponed from 2022 to 2023, reflecting guidance from global regulators.
“We are using the full flexibility of the EU’s banking rules and proposing targeted legislative changes to enable banks to keep the liquidity taps turned on, so that households and companies can get the financing they need,” said Valdis Dombrovskis, the EU commission’s executive vice-president in charge of financial regulation.
He urged banks to show restraint in paying bonuses and dividends, saying that spare cash should be harnessed to support businesses and households.
Loan demand from companies has shot up since the pandemic started, the ECB said, finding a net 26 percentage point increase in the number of banks reporting increased demand for credit from corporate customers. The ECB said the proportion of banks expecting corporate loan demand to rise in the second quarter increased by a net 77 percentage points, a record since its survey started in 2003.
However the tightening of credit availability reported by eurozone banks in the first quarter appeared to be much more “contained” than in previous downturns, such as in the 2008 financial crisis, according to the ECB. Banks reporting a tightening in credit standards for businesses increased by a net 4 percentage points in the first quarter, compared with the net 60 percentage points reported during the 2008 financial crisis.
Mr Dombrovskis said eurozone banks were expected to record an extra €100bn of provisions against bad loans this year and that the proposed rules change would free up an extra €30bn of capital by giving them capital relief on all of these provisions, instead of only 70 per cent under current regulations.
Brussels’s proposal would shield banks from the full impact of an accounting standard, known as IFRS 9, that has been the subject of furious lobbying from the banking sector. EU officials said that the €450bn figure was “a very informal projection” that reflected the capital relief they estimated would come from adjusting accounting rules.
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Brussels hopes that the regulatory adjustments can be legally adopted by June. The commission also published an “interpretative communication” to ensure banks do not apply existing accounting and capital rules too conservatively.
Mr Dombrovskis said that Brussels “will soon also be launching roundtable discussions bringing together consumer and business groups with the financial sector so that we can address the most urgent needs of our citizens and companies”.
The executive vice-president said the availability of bank loans varied across the continent, and was problematic in some countries.
