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
Previous ArticleECB Issues Updates to AnaCredit Reporting Manual
PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS published a statement guidance on dividend distribution by banks.
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.