Pandemic shows need to rework bank capital buffers, says EU

LONDON (Reuters) - The COVID-19 pandemic has highlighted flaws in the process by which banks can draw down from their capital buffers in a crisis to avoid crimping the flow of credit, a senior European Union official said on Thursday.

FILE PHOTO: Skyscrapers at sunset in the City of London's financial district, Britain February 12, 2018. REUTERS/Simon Dawson/File Photo

When economies went into lockdown in March to fight the pandemic, lenders were encouraged by European regulators to tap their capital buffers to help struggling businesses ride the storm.

Banks, however, found this would mean breaching other minimum requirements that act as a backstop to the main buffers, such as their leverage ratios.

“In terms of lessons learned, buffer usability is clearly an issue,” Martin Merlin, director for banking at the European Commission, the EU’s executive, told a European Banking Federation online event on banking and the pandemic.

“There are probably design issues in our buffer framework, the buffers did not work as intended, they are not dipped into,” Merlin said.

“Both at the EU and international level, we need to draw the lessons from the crisis but this cannot be done in haste and we need some time to do it right.”

Jose Manuel Campa, chair of the EU’s European Banking Authority, said the pandemic had accelerated the need to tackle “structural weaknesses” like poor profitability, over-capacity and business models that were not viable.

Campa said he expected no systemic issues from Brexit after banks moved people, portfolios and resources from London to hubs in the EU ahead of Britain’s full departure from the single market on Dec. 31.

“Hopefully, whatever that will come at year-end will not come as something to catch us by surprise,” added Elke Koenig, who heads the bloc’s Single Resolution Board for closing down failed banks.

The European Central Bank’s top banking supervisor told the event that lenders needed to prepare for a rapid deterioration in their balance sheets due to the pandemic and take decisive steps to restore profitability.

Reporting by Huw Jones; Editing by Pravin Char