Our response to the coronavirus pandemic
Unlike in the 2008 financial crisis, banks are not the source of the problem this time. But we need to ensure that they can be part of the solution.
We at the ECB have put in place a set of banking supervision and monetary policy measures to mitigate the impact of the coronavirus pandemic on the euro area economy and to support all European citizens.
Ensuring firms and households have access to credit
Banks play a vital role in supporting a healthy economy by ensuring that citizens and firms have access to funds they need for investment. Because of their special position in the economy, banks also have to abide by particular rules to ensure that they are solid enough to withstand shocks. One of these rules stipulates that banks have to hold extra funds – called capital buffers – in store for difficult times.
A key component of our crisis relief measures is encouraging banks to use their capital buffers now. This frees up capital for €120 billion. Banks can use these funds to absorb losses resulting from the crisis, or earmark them to finance up to €1.8 trillion in new loans to households and businesses.
It is exactly in times like these that banks should use their buffers. This helps ensure that households and businesses continue to have access to funding in this difficult period.Press release: ECB Banking Supervision provides temporary capital and operational relief in reaction to coronavirus Supervision. Explained.: Why do banks need to hold capital?
Reducing banks’ risks and increasing their lending capacity
Banks must follow rules regarding the loans they make. They should only give out loans they think people and businesses will be able to repay.
We also require banks to keep a close eye on the loans they have given out. When a bank determines a customer is unlikely to repay a loan, the bank must classify the loan as “non-performing” or “bad” and put aside money for the associated losses. If this situation occurs, the bank has fewer funds available to make other loans.
We understand that in a crisis situation even financially solid customers may have temporary problems paying back their loans. To avoid a situation where a bank is short of funds because more loans to such customers are being classified as “non-perfoming”, banks have been given more flexibility when they are classifying loans that are backed by public guarantees.
We have been also less strict about how much banks must put aside to prepare for losses on government-backed loans. This further frees up capital for loans to households and companies.Press release: ECB Banking Supervision provides further flexibility to banks in reaction to coronavirus Supervision.Explained.: What are non-performing loans (NPLs)? Press release: ECB extends recommendation not to pay dividends until January 2021 and clarifies timeline to restore buffers
Helping banks focus on providing vital funding to the economy
Supervision helps ensure the financial system remains stable. It also requires banks to fill an extensive set of requirements. In the midst of a crisis, when many banks are facing serious operational concerns, we have loosened some of the timetables to which supervised banks must adhere, so they can focus on their vital function: granting loans to households and businesses.
To do this, we adjust supervisory timetables, processes and deadlines according to each bank’s situation. For example, we can reschedule upcoming inspections in the supervised banks and extend deadlines for them to correct shortcomings identified in recent inspections.
We have also taken a pragmatic approach to the Supervisory Review and Evaluation Process (SREP). The aim has been to ensure an efficient and focused assessment of the banks directly supervised by the ECB, while reducing the burden compared with normal SREP cycles. The focus is on assessing banks’ ability to respond to current challenges and the most material risks and vulnerabilities related to the coronavirus situation.Press release: ECB Banking Supervision provides temporary capital and operational relief in reaction to coronavirus How does banking supervision work? Supervisory priorities SREP: The Supervisory Review and Evaluation Process
Encouraging banks to do their share
The crisis is extraordinarily difficult for people and companies across the euro area. To encourage banks and their shareholders to do their share, we have asked banks not to pay out dividends or buy back stocks for the time being – or at least to limit dividend distribution and bonuses. Instead, banks should use funds freed up from the measures we outlined above to absorb losses or to grant loans to the euro area economy. This will enable them to be part of the solution.
Press releasesECB asks banks to refrain from or limit dividends until September 2021 ECB asks banks not to pay dividends until at least October 2020 ECB extends recommendation not to pay dividends until January 2021 and clarifies timeline to restore buffers
Helping the economy absorb the shock through asset purchases and long-term loans to banks
To support the economy in the crisis the ECB has also launched a package of monetary policy measures to ensure that banks and companies have enough funds available.
For instance, we are buying several kinds of assets under the €1,850 billion pandemic emergency purchase programme (PEPP). For example, we buy bonds directly from banks. This way, we make more funds available that banks can lend to households or businesses. We also buy companies’ bonds, giving them an additional source of credit. Both kinds of purchases help boost spending and investment, with the aim of supporting economic growth.
We are also offering long-term loans at very favourable conditions to banks that keep up their lending to those who need it most. We are applying less strict rules on the assets banks must give as insurance, or “collateral”, for these loans, to ensure banks have enough collateral. This, again, helps ensure they can continue lending.
Press releasesMonetary policy decisions on 10 December 2020 ECB prolongs support via targeted lending operations for banks that lend to the real economy ECB extends pandemic emergency longer-term refinancing operations Monetary policy decisions on 4 June 2020 ECB announces package of temporary collateral easing measures ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP) ECB announces easing of conditions for targeted longer-term refinancing operations (TLTRO III)
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