Countercyclical buffer releases may free €6bn at top EU banks

Banco Santander and BNP Paribas could free €1.1 billion each

The near-universal abolition of countercyclical capital buffers (CCyB) across the European Union in the wake of the coronavirus crisis could ease the capital requirements of systemic banks by around €5.9 billion ($6.3 billion).

Since March 12, eight EU countries, plus Norway and the UK, have slashed CCyBs to or near zero. This reduces the Common Equity Tier 1 (CET1) capital requirements for exposures located in these countries, lowering overall mandated levels for European banks. 

Institution-specific CCyB rates are calculated as the weighted average of all CCyB rates that apply to a bank. With all but a few European CCyB rates cut to zero, these firm-specific amounts will fall to immaterial levels.

 

If all applicable CCyB rates were abolished at end-2019, the eight eurozone global systemically important banks (G-Sibs) would have seen their CET1 requirements lowered by €5.9 billion.

French giant BNP Paribas and Spanish lender Banco Santander may see the most easing. Their required CCyB capital amounts were €1.1 billion apiece at end-2019, with institution-specific CCyB rates of 0.17% and 0.19%, respectively.

Societe Generale, Crédit Agricole and Groupe BPCE had CCyB amounts of €966 million, €950 million and €928 million, respectively. 

UniCredit, Deutsche Bank and ING had amounts of €358 million, €265 million and €264 million.

Of those few European countries still with non-zero CCyBs in place, Bulgaria announced it would freeze its rate at 0.5%, scrapping increases planned for April 1 and early 2021. The Czech Republic's CCyB was still set at 1.75%, Slovakia’s at 1.5% and Luxembourg’s at 0.25% as of press time.

 

What is it?

The CCyB is a macroprudential tool, designed to combat procyclicality in the financial system. It was introduced by the Basel Committee on Banking Supervision in 2010 and transposed into EU law through the fourth Capital Requirements Directive of 2013. 

National authorities are obliged to build up their local CCyBs, set as a percentage of banks’ risk-weighted assets, when credit is booming and the banks under their supervision are believed to have heightened systemic risk. On the flip side, they are supposed to reduce them during a downturn to free up bank capital, which can be used to support the real economy.   

Why it matters

The European Central Bank told banks they could release their capital conservation and Pillar 2 guidance capital buffers without fear of penalty on March 12, and dropped a none-to-subtle hint to national regulators that efforts to stoke lending could be furthered if CCyBs were released, too.

Many have obliged the ECB. Now its up to the banks themselves to decide what to do with their liberated capital. Regulators want them to support an economy reeling from the impact of the coronavirus crisis. However, some firms may be incentivised to maintain their capital at elevated levels in anticipation of crushing losses in the months to come. In which case, the CCyB would have failed in its objective as an effective countercyclical measure.

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