ECB to let euro zone banks breach requirements due to coronavirus

FRANKFURT (Reuters) - The European Central Bank decided on Thursday to let euro zone banks fall short of some key capital and cash requirements as they struggle with the coronavirus outbreak.

The announcement came hot on the heels of a new stimulus package from ECB monetary policymakers -- an unprecedented synchronised move by its two arms, which function independently, to stave off a virus-induced recession in the euro zone.

"The ECB will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR)," ECB Banking Supervision said in a statement.

But it stressed that banks were expected to use the relief to keep credit flowing to the economy and not to increase dividends or bonuses.

Under the latest measures, banks will also be allowed to account bonds that do not currently qualify as capital, such as Additional Tier 1 or Tier 2 notes, to meet their requirements, bringing forward a rule change that was scheduled for 2021.

The ECB will also consider rescheduling inspections and extending deadlines to remedy shortcomings identified in the past, including with regard to unpaid loans.

"The coronavirus is proving to be a significant shock to our economies," said Andrea Enria, the ECB's chief supervisor. "Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties."

Minutes before the ECB's announcement, the European Union's banking watchdog said it has postponed this year's stress test of lenders until next year so that banks can focus on their businesses during the coronavirus epidemic.

(Reporting By Francesco Canepa; Editing by Catherine Evans)