The European Central Bank (ECB) has eased pressure on eurozone banks as it prepares for the coronavirus outbreak to worsen.
Announcing measures that it said would allow banks to continue “to fulfil their role in funding the real economy”, the ECB said it would continue to monitor the economic effects of the coronavirus (Covid-19) as they become apparent.
“The coronavirus is proving to be a significant shock to our economies. Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties. The supervisory measures agreed today aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff,” said Andrea Enria, the chair of the ECB supervisory board.
Earlier this week, the Bank of England provided a package of measures to boost bank lending in a synchronised move with the Treasury, including a 0.5 percentage point cut in the bank’s base interest rate. The US Federal Reserve has also cut interest rates by 0.5 percentage points to support households and businesses through the worst of the virus epidemic.
The ECB boss, Christine Lagarde, has predicted that the virus will spark an economic downturn in Europe similar to the 2008 financial crash unless EU governments provide financial support for their economies.
The ECB said it will conduct a new kind of targeted longer-term refinancing operation (TLTRO) aimed at banks lending to small- and medium-sized businesses (SMEs). These TLTROs will be conducted under even more favourable conditions than previous ones, it said, penalising banks if they fail to expand their lending to SMEs.
It also announced an additional “envelope” of €120bn of net asset purchases until the end of the year, effectively expanding its already vast quantitative easing programme.
But the decision to ease rules on capital and liquidity buffers allowing banks “to withstand stressed situations like the current one” and the other targeted measures were considered a weak response by investors, who sent shares on European markets further into the red.
The FTSE 100 tumbled more than 60 points after the move, adding further losses on a day when the index was down by more than 9% at lunchtime in London. The German Dax index dropped 170 points to 9,634, adding to losses earlier in the day that amounted to 804 points.
Marchel Alexandrovich, a senior European economist at investment firm Jefferies, said: “This is an underwhelming package from the ECB. There are better TLTRO terms, but no rate cut, and only €120bn of extra QE to be added until the end of the year
“On the ECB’s own forecasts the euro area in now likely entering a recession. So, one obvious question is: ‘What will the ECB do next if the crisis escalates?’.
“How Lagarde tackles that question could be critical in terms of the market reaction. And if she says ‘whatever it takes’, what will that mean in practice? On the face of it, the official measures are well short of what they should have been.”
The ECB said it could ease capital constraints on the banking sector after it built up a “significant amount of these buffers”.
“The measures provide significant capital relief to banks in support of the economy. Banks are expected to use the positive effects coming from these measures to support the economy and not to increase dividend distributions or variable remuneration,” the ECB said.
The European Banking Authority, an industry regulator, is delaying its EU-wide stress test by a year so that banks can focus on the challenges posed by the coronavirus outbreak.
Instead, the EBA said it would launch a transparency exercise to determine how much risk they hold on their balance sheets.
“Addressing any operational challenges banks may face should be the priority. The EBA has decided to postpone the EU-wide stress test exercise to 2021. This will allow banks to focus on and ensure continuity of their core operations, including support for their customers,” the EBA said.
It also urged national regulators to take advantage of existing rules that allow for some flexibility around the kind of capital that banks have to hold to cushion against potential downturns and risks.
The announcement comes just a week after EBA banned all external meetings at its Paris headquarters until 20 April to try to tackle the spread of Covid-19.
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