By Huw Jones
LONDON (Reuters) - Banks in the European Union are to get more capital relief so they can help companies struggling in the coronavirus pandemic but avoid having to make crippling provisions for loans hit by a looming deep recession, sources said on Monday.
The bloc's financial services chief Valdis Dombrovskis is expected to propose this week that the EU "emulate in some form" a move by the U.S. Federal Reserve to allow banks to ease how they calculate their leverage ratio, sources familiar with the package said.
The ratio is a yardstick of solvency that measures capital against total assets on a non-risk-weighted basis.
The Fed proposed that until March 2021 banks do not have to include holdings of U.S. government bonds and deposits parked at the central bank in their assets tally for calculating the leverage ratio.
This would free up their balance sheet to offer more loans to companies during the pandemic.
Dombrovskis is also expected to propose relief from an accounting rule for loan loss provisioning, the sources said.
The rule known as IFRS 9 forces banks to set aside some provisioning at the start of a loan and more later on if there is a risk of default, which for many corporate borrowers has become more likely as the pandemic shuts down swathes of economic activity.
Provisions translate into reductions in a bank's capital buffers.
Under current rules, banks that had decided before the pandemic to apply the new rule in full are not allowed to switch to an alternative, phased-in approach that offers temporary relief of up to 70% on the capital hit from provisioning.
The EU package would allow banks to switch to the phased-in approach, the sources said.
The Fed has already gone further by offering a two-year grace period on the capital hit from provisions, with a further three years over which to spread that impact.
Banks in Europe are expected to report higher provisions in upcoming first-quarter earnings due to the impact of national lockdowns on companies.
The European Commission declined to comment on the package.
Dombrovskis said on Friday that banks should make full use of the flexibility offered by capital and accounting rules.
"Next week, I will present a Communication to clearly identify where this flexibility is available and how it can be used," he said on Friday.
Dombrovskis is due to address the European Parliament's economic affairs committee at 1500 GMT.