European banks want regulators to align with US leverage plan

LONDON (Reuters) – Banks call on EU regulators to align with the US Federal Reserve’s plan to relax a rule that measures a bank’s capital reserves to promote cash flow to businesses affected by the coronavirus crisis.

Earlier this month, the Fed proposed a temporary relaxation of an additional leverage ratio rule that applies to the largest U.S. banks with assets over $ 250 billion.

This would allow US banks to expand their balance sheets by lending more to customers affected by the pandemic, but without exceeding their leverage ratio cap of 3% of capital over total assets.

A temporary easing of the ratio in Europe would ensure that aid measures by governments and central banks to help the economy recover work well in practice, said Gonzalo Gasos, senior director of prudential policy and supervision at the European Banking Federation, an industry body.

“The leverage ratio could be a barrier to cash flow,” Gasos said.

The ratio was bolstered after the global financial crisis ten years ago to act as a “backstop” to a bank’s core capital reserves.

“What we are asking regulators in Europe is whether reserves held with central banks and exposures to government bonds should be part of the leverage ratio,” Gasos said.

“In anticipation of the increase in the amount of exposures to central banks and governments, this could limit the capacity of banks’ balance sheets,” Gasos added.

The measures put in place by the European authorities are sufficient for the economy and the banks to withstand the crisis, he said.

“However, having this conceptual program in place does not necessarily mean that it will be implemented easily, so we are now working on the details to ensure that the liquidity is flowing as planned.”

Regulators across Europe already allow banks to tap into a capital pool, known as the countercyclical capital cushion, to keep credit in circulation. The Bank of England reassured lenders on Monday that they could use any of these buffers to help borrowers during the crisis and will have enough time to replenish them.

The leverage ratio is a measure of a bank’s capital relative to its assets on an un-risk-weighted basis, and larger banks face an additional or stricter version than their smaller rivals.

According to the Fed’s proposal, U.S. government bonds held by banks and bank deposits stored with the Fed are excluded from leverage ratio calculations until March 31, 2021.

Reporting by Huw Jones. Editing by Jane Merriman