Acting in line with the European Central Bank (ECB), De Nederlandsche Bank (DNB) today confirmed that there are exceptional circumstances due to the coronavirus (COVID-19) pandemic. In doing so, DNB announced with respect to the smaller banks under its direct supervision what the ECB today announced for larger European banks. Declaring exceptional circumstances automatically results in relief with regard to calculating, reporting and disclosing what is known as the leverage ratio.
The relief measure applies until 27 June 2021. It allows banks to temporarily exclude specific central bank exposures when calculating, reporting and disclosing their leverage ratio. Such assets include coins and banknotes and, more importantly, deposits held at the central bank. The ECB's press release, which was issued today, explains that the move is aimed at easing the implementation of monetary policy.
A key yardstick for investors, a bank's leverage ratio expresses its total exposure as a percentage of its own funds. It is one of the metrics that indicate a bank's shock absorption capacity. A 3% leverage ratio requirement will become binding on 28 June 2021, when the new Capital Requirements Regulation (CRR) comes into effect, but banks are already required to report and disclose their current leverage ratio.
The decision to exclude specific central bank exposures temporarily benefits banks in terms of their scope for lending. The ECB expects the relief measure to raise the aggregate leverage ratio by about 0.3 percentage points.
The ECB and DNB would have to take a new decision should they wish to further extend the exclusion, when the CRR comes into effect on 28 June 2021. They could then take the same measure for a maximum period of twelve months. This would require an upward adjustment of the 3% leverage ratio requirement to compensate for any exclusion of specific central bank exposures.
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