ECB cuts even more slack to virus-stricken euro zone banks

FILE PHOTO - Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - European Central Bank supervisors decided on Friday to provide fresh relief to euro zone banks struggling with the coronavirus outbreak, including by offering wiggle room in accounting rules.

With parts of the single currency zone’s economy in standstill and financial markets in turmoil, the ECB has been aggressively easing its own lending conditions and demands it places on banks on its watch.

Only a week after letting banks eat into their capital buffers, the ECB encouraged them to avoid setting aside too much cash against loans because that would further strangle the flow of credit to the economy.

“Within its prudential remit, the ECB recommends that all banks avoid procyclical assumptions in their models to determine provisions,” the ECB said.

It added banks should opt for so-called IFRS 9 transitional rules, which would give them further room for maneuver from existing accounting standards demanding that banks partly provision for a loan upfront in expectation of losses in its first year.

The ECB also said its supervisors will “exercise flexibility” with regards to unpaid loans covered by state guarantees or moratoria put in place in response to the virus.

“This really shows that they see banks as part of the solution, so they are moving to help them from all directions,” said Marco Troiano, a director at Scope Ratings.

“With this, they lower the immediate need for provisions, limiting the damage to the profit & loss (account),” he added.

ECB Banking Supervision also put a number on the measures announced last week, saying they provide capital relief worth 120 billion euros ($128.5 billion) which could be used to absorb losses or to finance credit worth 1.8 trillion euros.

Reporting By Francesco Canepa; Editing by Balazs Koranyi and Andrew Cawthorne