(Bloomberg) -- European banks are close to receiving capital relief on their holdings of sovereign debt as lawmakers bolster a package of measures intended to protect the industry from aftershocks of the coronavirus pandemic.
The European Union’s 27 member states agreed this week to sign off on legislation that would offset the “considerable negative impact” on capital requirements from any losses on government bonds, according to a document seen by Bloomberg News that summarizes the deal.
High volatility in sovereign bond markets is threatening to crimp banks’ lending capacity, according to the document, as governments around the world count on lenders to keep credit flowing through the economy. A so-called prudential filter would temporarily free banks from taking a hit to their capital ratios should their portfolios of government debt shrink in value.
A panel of lawmakers in the European Parliament in Brussels also supported the legislation this week, putting it on course for final agreement within days. Spain and Italy were among the main backers of the policy as debate proceeded in recent weeks, according to a separate document.
This newest measure is a late addition to a package of relief that’s designed to soften the burdens of regulation on banks. Lenders will get a big break on leverage restrictions, additional flexibility to deal with non-performing loans, and savings on capital when they invest in software and lend to small business.
Prices of bonds issued by countries including Spain and Italy fell significantly in the wake of the virus outbreak. A 1.35 trillion-euro ($1.53 trillion) asset-purchase program by the European Central Bank and an EU plan for a joint fiscal response restored some calm to the markets in recent weeks.
The ECB has also moved to support financial firms since the crisis outbreak, including giving investment banks’ trading desks a break on capital rules for market risks. Banks have lobbied for years to roll back 2008 crisis-era regulations designed to make them safer, and many of those wishes are being granted to give them greater flexibility, though the ECB has said the relief will be temporary.
The latest measures may especially benefit Italian banks which have large holdings of the country’s bonds. Intesa Sanpaolo (OTC:ISNPY) has about 100 billion euros of sovereign debt, including insurance and banking assets, making it the second-biggest creditor of the state after the ECB, CEO Carlo Messina said earlier this month.
(Adds Intesa holdings in final paragraph)
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