Featured Product

    ECB Publishes Eleventh Issue of the Macroprudential Bulletin

    October 19, 2020

    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
    Related Articles
    News

    PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December

    PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.

    November 30, 2020 WebPage Regulatory News
    News

    SRB Sets Out Work Program for 2021-2023

    SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.

    November 30, 2020 WebPage Regulatory News
    News

    EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting

    EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.

    November 30, 2020 WebPage Regulatory News
    News

    US Agencies Issue Statement on LIBOR Transition

    US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition.

    November 30, 2020 WebPage Regulatory News
    News

    GHOS Endorses Coordinated Approach to Mitigate COVID Risks for Banks

    The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS, endorsed a coordinated approach to mitigate COVID-19 risks to the global banking system.

    November 30, 2020 WebPage Regulatory News
    News

    HM Treasury Extends Consultation Dates for FRF and Solvency II Reviews

    HM Treasury extended the consultation period on Phase II of the Future Regulatory Framework (FRF) Review, from January 19, 2021 to February 19, 2021.

    November 30, 2020 WebPage Regulatory News
    News

    ECB Publishes Guide on Management of Climate and Environmental Risks

    ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.

    November 27, 2020 WebPage Regulatory News
    News

    BCBS Amends Capital Treatment of Non-Performing Loan Securitizations

    BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.

    November 26, 2020 WebPage Regulatory News
    News

    PRA Policy on Stressed VaR and RNIV Calculations Under Market Risk

    PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework.

    November 26, 2020 WebPage Regulatory News
    News

    BoE to Move Statistical Data Collection to BEEDs Portal

    BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.

    November 25, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6179