Background

In general, macroprudential tools enable the competent authorities to take legal supervisory measures to ensure financial stability. The countercyclical capital buffer specifically is intended to make the banking sector resilient in the face of systemic risks associated with the credit cycle. The idea behind the countercyclical capital buffer is as follows: in times of excessive credit growth, banks are required to build up an additional capital buffer. This buffer generally increases the loss-absorbing capacity of banks. In times of crisis, banks are explicitly allowed to use up the buffer and to use it to mitigate losses. This is aimed at preventing a credit crunch.

Countercyclical capital buffer in Germany

The value for the countercyclical capital buffer in Germany is defined by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). This usually amounts to between 0% and 2.5% and can be set in 0.25 percentage-point increments. If necessary, a value in excess of 2.5% can be set.

The decision regarding the buffer rate is based on an analysis of a variety of factors. The primary indicator is the development of the credit-to-GDP gap, i.e., the deviation in the ratio of lending to gross domestic product from the long-term trend. A series of additional supporting indicators are also used to evaluate the cyclical systemic risk. Finally, other information may be taken into account, such as quantitative and qualitative market and banking supervisory information, as well as stress test results. The rate for the domestic countercyclical capital buffer is determined on the basis of a consideration of the overall picture. A detailed description of how to determine an appropriate countercyclical buffer is provided in an analytical paper published by the Bundesbank.

BaFin also takes recommendations by the Financial Stability Committee (Ausschuss für Finanzstabilität – AFS) and the European Systemic Risk Board (ESRB) into account when determining the countercyclical capital buffer.

Institution-specific countercyclical capital buffer

Institutions must factor the relevant value for Germany into their calculations for the institution-specific countercyclical capital buffer and apply this to the total significant credit risk exposures in Germany.
Institutions that have significant credit risk exposures in other countries must also take the countercyclical capital buffer applicable in those countries into consideration. Significant credit risk exposures include all credit risk exposures specified in section 36 of the German Solvency Regulation (Solvabilitätsverordnung – SolvV); in principle, this includes all credit risk exposures towards the private sector. The individual (institution-specific) countercyclical capital buffer is calculated as the weighted average of the capital buffer in Germany and abroad. The institutions must then maintain this buffer as a percentage of their total risk exposure amount pursuant to Article 92(3) of the Capital Requirements Regulation (CRR) ² in their Common Equity Tier 1 capital.

Current countercyclical capital buffer in Germany

Based on the current risk situation, in addition to the development of the credit-to-GDP gap and the supporting indicators, BaFin has decided that it is appropriate to maintain the rate to 0.75% for the third quarter of 2024 as of 1 August 2024.

The credit-to-GDP gap calculated under the national method is currently - 1.12 percentage points [PP] (Q1 2024). This implies a buffer guide of 0%. Thus, the credit-to-GDP gap decreased further. Under the standardised method, the credit-to-GDP gap for the most recent available quarter is - 2.64 PP (Q4 2023). The corresponding buffer guide is also 0%.

Credit-to-GDP ratio, trend and gap

The graphic shows the credit-to-GDP ratio and the trend in percent according to the national method. Source: BaFin

Credit-to-GDP gap and buffer guide

The graphic shows the credit-to-GDP ratio and the trend in percent according to the national method. Source: BaFin

In addition to the credit/GDP gap, BaFin looks at a number of other indicators in order to assess the risk situation as effectively as possible. Although financial cyclical risks have recently eased, there are still significant vulnerabilities in the German financial system due to the prolonged build-up of risk in the previous years. New lending to domestic NFCs remains high and the overall level of risk remains elevated. Despite the interim decline in prices, there are still substantial overvaluations in the housing market. Loan holdings remain well above the long-standing average for both households and the corporate sector.

There is also a weak economic outlook. Increasing bankruptcies and loan losses, such as commercial real estate loans, are expected. Geopolitical risks (including war in Ukraine, Middle East conflict) lead to high uncertainty in many sectors of the economy and the financial system. At present, the economic impact on the German economy and the German financial system is not yet to be assessed with sufficient certainty.

The countercyclical capital buffer strengthens the resilience of the banking system. This is particularly important in the current macro-financial environment, where risks are gradually materialising.

The evolvement is closely monitored. The values and brief descriptions of the key indicators can be found here.

Overview – historical capital buffers

Footnotes