ECB Publishes Eleventh Issue of the Macroprudential Bulletin
ECB published eleventh issue of the Macroprudential Bulletin, which provides insight into the ongoing work of ECB in the field of macro-prudential policy. The bulletin includes articles on the usability of macro-prudential capital buffers, financial market pressure as an impediment to usability of capital buffers, the role of capital buffers in containing the reduction of lending during COVID-19 crisis, and enhancement of macro-prudential space when interest rates are low for long. The bulletin provides an overview of the macro-prudential capital requirements in euro area countries, as of October 01, 2020; it also provides information on other macro-prudential measures taken by the member countries since the last issue of the Macroprudential Bulletin in October 2019.
Usability of macro-prudential capital buffers. This article discusses the capital buffer framework under Basel III, with focus on the issue of buffer usability. Although buffers are intended to be used in a crisis, a number of factors can prevent banks from drawing them down in case of need, with potentially adverse effects for the economy. The article reviews the functioning of the framework in the COVID-19 crisis and outlines possible implications for future policy design. The article emphasizes the importance of clear and convincing communication for mitigating a number of impediments to buffer usability. It also calls for a medium-term rebalancing between structural and cyclical capital requirements, as a greater share of capital buffers that can be released in a crisis would enhance macro-prudential authorities’ ability to act countercyclically.
Financial market pressure as an impediment to usability of capital buffers. This article discusses how market pressure can impede the usability of regulatory buffers. The capital relief measures in the euro area since the outbreak of the COVID-19 crisis had so far mixed effects on banks’ target common equity tier (CET) 1 ratio, suggesting an impeded pass-through. Market pressure can be a key explanatory factor, with pressure from credit and, critically, equity investors. Bondholders may require banks to maintain higher capital ratios to reduce default risk, while shareholders may pressure banks to continue dividend payments rather than to use excess capital to lend or to absorb losses. Despite these potential impediments, it may still be too early to draw a final conclusion, because losses have been prevented or delayed and lending has been supported by other broad-based policy measurers beyond prudential policies.
Buffer use and lending impact. This article analyzes the role of capital buffers in containing the reduction of lending to the real economy during the COVID-19 crisis. The assessment compares the results when banks are willing to use the buffers with the outcomes when they refrain from using the buffers by using the macro-micro model banking euro area stress test model (BEAST). The results show that banks’ use of capital buffers leads to better economic outcomes, without a negative impact on their resilience. Banks’ willingness to use capital buffers is reflected in higher lending, with positive effects on GDP and lower credit losses, while the resilience of the banking system is not compromised.
Enhancing macro-prudential space when interest rates are low for long. The article shows that enhancing countercyclical capacity can improve the policy mix available to achieve macro-financial stabilization. The availability of larger releasable buffers before the pandemic would have provided an important complement to the monetary policy mix. Had authorities built up larger countercyclical buffers (CCyB) before the pandemic, it would have been easier to release usable capital in response to the crisis. The prevailing “lower for longer” interest rate environment reinforces the case for building up releasable bank capital buffers in good times to be consumed when a crisis hits, thereby lowering the point where dividend restrictions would be triggered. This article shows that the usefulness of creating macro-prudential space by enhancing countercyclical capacity (via proactive use of the CCyB) can effectively complement monetary policy actions during a crisis, particularly when constrained by the effective lower bound on interest rates.
Related Links
Keywords: Europe, EU, Banking, COVID-19, Macro-Prudential Bulletin, Macro-Prudential Policy, Basel, Regulatory Capital, CCyB, Systemic Risk, Stress Testing, ECB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
EIOPA on Supervisory Approach to Product Oversight and GovernanceRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.