The European Central Bank is set to allow EU banks to exclude some central bank exposures from the leverage ratio in response to “exceptional circumstances” brought on by COVID-19 pandemic.
Based on end-March data, the exclusion would raise the aggregate leverage ratio of 5.36 percent by about 0.3 percentage points.
The move is aimed at easing the implementation of monetary policy by banks and will remain in effect until 27 June 2021.
Banks can benefit from this exclusion when they communicate their leverage ratios, which is a “key yardstick for investors,” ECB says.
The 3 percent leverage ratio requirement will become binding on 28 June 2021 but banks are already required to disclose their current leverage ratio.
The Capital Requirement Regulation (CRR), as amended by the CRR ‘quick fix’, allows banking
supervisors approve banks’ exclusion of central bank exposures from their leverage ratio for assets including coins and banknotes as well as deposits held at the central bank.
ECB may choose to extend the exclusion beyond June 2021, when the 3 percent leverage ratio requirement will become binding.
This would require an upward recalibration of the 3 percent leverage ratio requirement.
The move was endorsed by the governing council of the ECB which opines: “The situation brought about by the COVID-19 pandemic has affected all euro area economies in an unprecedented and profound way.
“This situation has resulted in an ongoing need for a high degree of monetary policy accommodation, which in turn requires the undeterred functioning of the bank-based transmission channel of monetary policy.”
