The ECB Walks a Tightrope on Banks
The supervisor was right to ease rules on lenders during the crisis. Now the challenge is determining when (and whether) to get tougher.
Can the ECB stay flexible?
Photographer: Arne Dedert/picture alliance
The pandemic has forced European governments to prop up their economies. They’ve rolled out furlough schemes, allowing millions of workers to keep their jobs, as well as “moratoria” suspending loan repayments for families and businesses. Now these countries face a dilemma over when to terminate such programs. Forcing companies to pay back debts too soon will put some promising ones out of business; postponing the inevitable for too long risks keeping zombie companies alive.
The puzzle over loan repayments speaks to a broader challenge facing financial regulators and supervisors. The European Central Bank has taken some steps this year to provide greater flexibility for lenders on prudential requirements, so that they can continue to support their customers. These measures — which include allowing banks to operate with less regulatory capital — will need to go eventually, but it is not yet clear when that will be. For now, the ECB needs to remain flexible, while resisting calls for a more permanent overhaul of its rules.