Barclays: ECB Leverage Ratio relief not a game changer for euro short rates

The ECB Banking Supervision’s decision limits the impact of banks’ balance sheet expansion due to the big reserves increase on their lending activity and market intermediation. Barclay analysts do not expect the LR relief to have a meaningful market impact apart from a possible easing in the usual end-of-quarter pressures on short rates.

Banks are still required to disclose their leverage ratios even if the LR comes into force only in June 2021 Given they have to disclose their leverage ratios both with and without the impact of excluded exposures, they are likely to continue to commit to meeting this regulatory requirement ahead of its official introduction.

However, the eased stance taken by the supervisor might give them some margin of flexibility as long as the level is above the regulatory threshold, thus attenuating the impact of balance sheet constraints on market intermediation activity, especially at the reporting dates.

“Therefore, we do not expect the temporary relief to the LR calculation to have a meaningful market impact apart from a possible reduction in the usual end-of-quarter pressure on short rates,” analysts wrote.


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