ECB Publishes Eleventh Issue of the Macroprudential Bulletin

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

• Macroprudential Bulletin
• Changes to Policy Measures

Keywords: Europe, EU, Banking, COVID-19, Macro-Prudential Bulletin, Macro-Prudential Policy, Basel, Regulatory Capital, CCyB, Systemic Risk, Stress Testing, ECB