March 2, 2018 / 10:27 AM / 17 days ago

ECB sets new rules on bank capital and cash

FRANKFURT (Reuters) - The European Central Bank published new guidelines on Friday defining how euro zone banks should calculate how much capital and cash they must hold for their own safety.

FILE PHOTO: European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany December 14, 2017. REUTERS/Ralph Orlowski/File Photo

The new guidelines, which will kick in next year, set out “principles” such as the need for banks to run “stress tests” to quantify their robustness in different circumstances.

Although the proposed guidelines are non-binding, the ECB can threaten banks with higher capital requirements if they fail to comply.

The initiative follows the demise of four euro zone banks in the past year, including Spain’s Banco Popular that found itself out of cash after a run on its deposits.

“Supervisory experience shows that banks may need to improve they quality of their internal capital and liquidity adequacy assessment processes,” the ECB said.

The ECB said the new guidelines aim at smoothing out differences among the roughly 120 large euro zone banks it supervises.

“Banks are expected to assess the risks they face, and in a forward-looking manner ensure that all material risks are identified, effectively managed and covered by adequate capital and liquidity levels at all times,” it added.

The ECB will now seek industry feedback on the proposed new rules via a public consultation due to run until May 4.

Reporting By Francesco Canepa; Editing by Jon Boyle

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