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    ECB Allows Temporary Relief in Leverage Ratio Amid COVID-19 Pandemic

    September 21, 2020

    ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio. Such exposures include coins, banknotes, and deposits held at the central bank. The temporary exclusion of these central bank exposures from the total exposure measure is in view of the COVID-19 pandemic and banks may benefit from this relaxation until June 27, 2021. The decision shall enter into force on the fifth day following that of its publication in the Official Journal of the European Union. BaFin and DNB also announced the application of this relief measure to the smaller banks (at times also called the less significant institutions in EU) that are under their direct supervision.

    The Capital Requirement Regulation (CRR), as amended by the CRR “quick fix,” allows banking supervisors, after consulting the relevant central bank, to allow banks to exclude central bank exposures from their leverage ratio. Banks can benefit from this exclusion when they communicate their leverage ratios, which constitute a key yardstick for investors. Based on end-March 2020 data, this exclusion would raise the aggregate leverage ratio of 5.36% by about 0.3 percentage points. The 3% leverage ratio requirement will become binding on June 28, 2021 but banks are already required to disclose their current leverage ratio. This is also important for globally systemically important banks (G-SIBs) and subsidiaries of foreign G-SIBs, for whom the measure additionally provides relief under the already binding total loss-absorbing capacity (TLAC) requirement. The ECB Banking Supervision and DNB would have to take a new decision if they wish to further extend the exclusion, when the CRR comes into effect on June 28, 2021 and the 3% leverage ratio requirement becomes binding.

     

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    Keywords: Europe, EU, Netherlands, Germany, Banking, COVID-19, Leverage Ratio, Basel, CRR, TLAC, G-SIB, Less Significant Institutions, DNB, ECB

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