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Law360, London (April 17, 2020, 10:59 AM BST ) The European Central Bank has temporarily eased capital rules that banks must follow to prevent risk to the markets, as it seeks to reduce volatility in the price of securities caused by the coronavirus pandemic.
The ECB said on Thursday that it will reduce the so-called qualitative market risk multiplier for six months. The supervisory measure, which is set by national regulators, obliges banks to hold extra money in case they underestimate how much they need to keep in reserve to protect them against market risk.
But banks can now hold a lower amount, the European Union authority said. They hold enough money to deal with market volatility worse than what they predicted in their internal models, which they use to estimate their own fund requirements.
The ECB said its relief measures will help lenders continue to buy and sell securities so that the market remains liquid during the economic crisis caused by the spread of COVID-19.
"With this decision, the ECB is responding to the extraordinary levels of volatility recorded in financial markets since the outbreak of the coronavirus," the euro area central bank said. "This decision will be reviewed after six months on the basis of observed volatility."
The measure is the latest move by the ECB to ensure that banks stay afloat and can continue to lend during the pandemic. The authority relaxed other capital requirements in March.
The ECB said at the time that it will allow banks to allocate less money to their capital buffers than they are required to under the EU's Pillar 2 framework, which ensures that banks have enough cash to deal with risks.
The central bank also said that banks can put less cash into the capital conservation buffer, which ensures that lenders build up their capital holdings outside times of stress. Lenders can also hold fewer assets than required under the liquidity coverage ratio — which forces them to hold sufficient liquid assets to allow cash outflows for 30 days.
The relaxation in capital requirements comes as the global spread of the COVID-19 disease is expected to hit profits in the financial sector as it causes consumer and business spending and borrowing to stagnate.
The central bank also set out monetary policy steps to provide banks and borrowers with greater access to credit if cash circulating in the financial system runs short.
The ECB said on Wednesday that it supports capital relief measures announced by national watchdogs across the bloc in response to the coronavirus outbreak, which will free up more than €20 billion ($21.5 billion) for banks.
--Editing by Ed Harris.
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