ECB published Issue 8 of the Macroprudential Bulletin, which provides insight into the ongoing work of ECB in the field of macro-prudential policy. ECB also published the statement of the Vice-President Luis de Guindos on the bulletin. This issue focuses on the development of the sectoral macro-prudential framework as well as on the impact of countercyclical capital requirements on bank lending and the broader economy. This bulletin includes three articles on key macro-prudential topics: the macroeconomic impact of changes in economic bank capital buffers, the importance of reciprocity arrangements for the use of sectoral capital buffers, and the specific features of the countercyclical capital buffer (CCyB) and its sectoral application (SCCyB).
Specific features of CCyB and SCCyB. This article discusses the advantages and shortcomings of the sectoral application of CCyB for addressing sectoral systemic risks. The article explores and compares the effectiveness of the CCyB and SCCyB in enhancing banks’ resilience and curbing credit cycles, using a calibrated dynamic stochastic general equilibrium model for the euro area. Results show that if risks are confined to a particular credit sector, a SCCyB could prove more effective than the CCyB in strengthening bank resilience to the target sector and in mitigating sectoral credit imbalances.
Importance of reciprocity arrangements for the use of sectoral capital buffers. This article explores the relevance of sectoral cross-border credit provided via foreign branches or direct cross-border lending in the Single Supervisory Mechanism (SSM) area. The cross-border recognition of these exposures through mandatory reciprocity arrangements may prove significant in an integrated financial system to level the playing field for domestic and foreign banks. This is important because financial services provided via foreign branches or direct cross-border exposures would otherwise not be subject to a macro-prudential measure taken in a host member state. The results of analysis support the introduction of mandatory reciprocity arrangements for sectoral capital buffers where exposures are material, in an effort to foster the effectiveness of macro-prudential policies.
Macroeconomic impact of changes in economic bank capital buffers. This article estimates the impact of countercyclical bank capital requirements on bank lending and the economy. Due to the limited use of CCyB, estimations are based on target economic capital ratio, which is the capital ratio that a bank would like to hold considering its own characteristics and macroeconomic conditions. The assumption is that the effects of changes in target ratios are similar to the effects of changes in CCyB. Results show that a sudden decline in economic capital buffers, such as one arising from an increase in the target capital ratio, leads to a modest decline in output and prices and to a larger decline in bank lending growth, suggesting that countercyclical capital-based macro-prudential policy measures can be useful to dampen the financial cycle.
Keywords: Europe, EU, Banking, Macroprudential Bulletin, CCyB, Macro-Prudential Policy, SCCyB, Capital Buffers, Sectoral CCyB, ECB
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