The European Central Bank (ECB) has offered a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements.
The decision comes amid the volatility and challenges associated with the COVID-19 pandemic.
In addition to smoothing procyclicality, the ECB said it aims to maintain banks’ ability to provide market liquidity and to continue market-making activities.
The ECB is also temporarily reducing a supervisory measure for banks, which is set by supervisors and is used to compensate for the possible underestimation by banks of their capital requirements for market risk.
In the announcement, the ECB said: “This temporary reduction of the qualitative multiplier compensates for currently observed increases of another factor, the quantitative multiplier, which can rise when market volatility has been higher than predicted by the bank’s internal model.”
It noted that the decision will be reviewed after six months on the basis of observed volatility.
