Erscheinung:04.09.2019 | Reference number R 1-AZB 1134-2019/0001 | Topic Macroeconomic supervision, Own funds General Administrative Act governing the rate for the domestic countercyclical capital buffer under section 10d of the KWG
Pursuant to section 10d of the KWG and in accordance with the Recommendation of the German Financial Stability Committee as of 27 May 2019 the rate for the domestic countercyclical capital buffer is set at 0.25 per cent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013, effective 1 July 2019.
This translation is furnished for information purposes only. The original German text is binding in all respects.
The Federal Financial Supervisory Authority is enacting the following
General Administrative Act:
1. Effective 1 July 2019, the rate for the domestic countercyclical capital buffer is increased to 0.25 per cent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013.
2. With effect from 1 July 2020, the rate specified in paragraph 1 must be used to calculate the institution-specific countercyclical capital buffer.
3. The General Administrative Act is addressed to institutions as defined in section 1 (1b) of the Banking Act (Kreditwesengesetz – KWG) and to groups of institutions, financial holding groups and mixed financial holding groups in which at least one member is an institution that must meet the requirements of section 10d (1) sentence 1 of the KWG at the individual institution level, as well as institutions referred to in Article 22 of Regulation (EU) No. 575/2013. It does not apply to the undertakings referred to in section 2 (9c) and (9e) of the KWG as well as the undertakings referred to in section 2 (9g) and (9h) of the KWG, subject to the conditions set out there.
4. The General Administrative Act is deemed to be announced on the day following its publication.
Grounds:
I.
The Act transposing Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and aligning supervisory law with Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (Act Implementing CRD IV – CRD IV-Umsetzungsgesetz) introduced the requirements set out in section (10d) of the KWG governing the countercyclical buffer with effect from 1 January 2014. This transposed into German law the requirements of Articles 130, 135 to 140 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (Text with EEA relevance) (Capital Requirements Directive – CRD).
On 18 June 2014, the European Systemic Risk Board adopted a Recommendation on guidance for setting countercyclical buffer rates (ESRB/2014/1).
In 2015, the Deutsche Bundesbank and the Federal Financial Supervisory Authority (BaFin) published a methodological note on setting the rate for the countercyclical capital buffer in Germany with the title “Analytical framework for the assessment of an appropriate domestic buffer rate” (referred to in the following as the “methodological note”) that takes Recommendation ESRB/2014/1 into account. To set the rate for the domestic countercyclical capital buffer, the methodological note stipulates, in a first step, the calculation of a buffer guide that is based on the deviation in the ratio of domestic lending to GDP (ratio of credit-to-GDP) from the long-term trend and is normally higher than zero if the ratio of credit-to-GDP deviates by more than two percentage points from its long-term trend.
There are different approaches to calculating the buffer guide. The first of these is to calculate the buffer guide using the standardised method. This corresponds to a proposal by the Basel Committee on Banking Supervision (BCBS) on how to calculate the deviation in the ratio of credit-to-GDP from its long-term trend (credit-to-GDP gap, see also the definition in section 2.1.1. (d) of ESRB/2014/1). The buffer guide can also be calculated using the methodology described in greater detail in the methodological note, which differs from the standardised method due to its narrower definition of credit and a modification of the conversion formula for the buffer guide. The national method produces more beneficial results than the standardised method (see page 18 et seq. of the methodological note).
According to the methodological note, the buffer guide is a “rule-based component” that represents an indicator for setting the rate for the domestic countercyclical capital buffer, but that does not lead to any automatic setting of the rate for the domestic countercyclical capital buffer. The rate for the domestic countercyclical capital buffer is set in an overall assessment that, in addition to the buffer guide, takes into account supporting indicators that capture important aspects of financial stability, as well as additional information if appropriate.
Effective 1 January 2016, BaFin set the rate for the domestic countercyclical capital buffer at 0 per cent. In this respect, reference is made to the General Administrative Act on the setting of the rate for the countercyclical capital buffer pursuant to section 10d (3) sentence 2 of the German Banking Act (Kreditwesengesetz – KWG) of 28 December 2015, reference number BA 51-AZB 1130-2015/0009. Since that date, the rate has been assessed once a quarter in accordance with the requirements of section 10d (3) sentence 2 of the KWG. In its assessment, BaFin has been considering deviations in the ratio of credit-to-GDP from its long-term trend and any recommendations by the Financial Stability Committee (section 10d (3) sentence 3 of the KWG).
As at the third quarter, the buffer guide calculated in accordance with section 33 (1) of the Regulation governing the capital adequacy of institutions, groups of institutions, financial holding groups and mixed financial holding groups (Verordnung zur angemessenen Eigenmittelausstattung von Instituten, Institutsgruppen, Finanzholding-Gruppen und gemischten Finanzholding-Gruppen) (Solvency Regulation/Solvabilitätsverordnung – SolvV) and calculated pursuant to the methodological note was 0 per cent. The credit-to-GDP gap on which the buffer guide is based changed as follows since the second quarter of 2018 (amounts shown in percentage points):
Q2 2018 | Q3 2018 | Q4 2018 | Q1 2019 | |
---|---|---|---|---|
National credit-to-GDP gap | -2.00 | -1.43 | -0.85 | -0.22 |
Standardised credit-to-GDP gap | -1.20 | -0.98 | 0.57 | n.a. |
Based on the most recent figures available for the first quarter of 2019, the credit-to-GDP gap calculated using the national method is thus 0.22 percentage points.1 After 0.85 percentage points in the fourth quarter of 2018 and –1.43 percentage points in the third quarter of 2018, the credit-to-GDP gap has been moving towards the activation threshold.
Using the standardised method (based on the proposal in the BCBS guidance for calculating the credit-to-GDP gap), the credit-to-GDP gap is 0.57 percentage points for the most recent quarter available (fourth quarter of 2018), following 0.98 percentage points in the third quarter of 2018.
The longer-term trend for the credit-to-GDP gaps using the national and standardised methods is shown in the following graphic:
Credit-to-GDP Gaps
The graphic shows the credit-to-GDP gap using the national and standardised methods. The activation threshold describes the value above which a positive buffer guide would normally result.
BaFin
This graphic shows that, despite the differences in calculating the credit-to-GDP gap using the standardised and national methods when it comes to the details, the changes are similar and the trends generally match in both cases.
On 17 May 2019, the International Monetary Fund (IMF) published the Concluding Statement on its 2019 Article IV Mission. The IMF concludes that there are cyclical systemic risks in Germany and recommends raising the countercyclical capital buffer in order to enhance resilience in the banking system.2
Furthermore, the Financial Stability Committee adopted the following Recommendation at its meeting on 27 May 2019:
This recommendation is based on an analysis and assessment of the risk situation for the German banking system by the Financial Stability Committee with the conclusion that there are cyclical systemic risks that can impair financial stability in Germany.
The explanatory remarks on the recommendation by the Financial Stability Committee explain the background to the recommendation in detail (the footnotes from the recommendation are added in square brackets to the quoted text below):
BaFin concurs with and endorses the explanatory remarks on the recommendation.
More recent data on changes in the credit-to-GDP gaps and the supporting indicators than the data referred to in the explanatory remarks on the recommendation by the Financial Stability Committee is available to BaFin. The latest figures are published on BaFin’s website.
BaFin assessed the Financial Stability Committee’s explanatory remarks on cyclical systemic risk for plausibility and up-to-dateness, and established that they are accurate overall. BaFin reviewed and scrutinised the individual aspects in depth and considered their accuracy and the correct integration of the arguments.
In addition, based on the most recent data provided by the Deutsche Bundesbank on the countercyclical capital buffer, BaFin assessed the further validity of the Financial Stability Committee’s risk assessment dated 27 May 2019. BaFin considers the risk assessment to still be valid.
Additionally, BaFin analysed the potential impact of the phase-in of the countercyclical capital buffer on the institutions’ capital, based on the COREP reports as at 31 December 2018. In the overall assessment, a German countercyclical capital buffer will result in an additional capital requirement of EUR 5.3 billion for the German banking sector. The institution-specific charge varies between 0.02 percentage points and 0.25 percentage points of the overall capital requirements. Overall, the banking sector can well handle this measure.
In connection with the planned General Administrative Act, BaFin conducted a consultation procedure from 11 June 2019 to 25 June 2019 to give the institutions concerned an opportunity to comment on material facts driving the decision. The consultation was published on BaFin’s website on 11 June 2019.
BaFin received comment letters in response to the consultation.
The comment letters resulted in particular in the following arguments:
It was claimed that the economic situation was less favourable than described by the Financial Stability Committee, and that the activation of the countercyclical capital buffer would therefore come too late. In addition, systemic risks had not accumulated to the extent portrayed by the Financial Stability Committee. And the resilience of the banking system was better than implied by the Financial Stability Committee.
In terms of the details, there was criticism that the economic situation is more advanced than assumed by the Financial Stability Committee, and that the phase-in of a countercyclical capital buffer would therefore potentially have a procyclical effect. It was also claimed that the target equity ratio (Pillar 2 guidance – P2G) was already positively impacting financial stability because it was applied to all institutions. There was a contention that it was not possible to guarantee any actual “cyclical” breathing in the capital requirements by means of the countercyclical capital buffer because it could not reduce capital requirements in a stress situation. Additionally, BaFin should have waited for the results of a survey on lending standards conducted by BaFin and the Deutsche Bundesbank before raising the rate for the domestic countercyclical capital buffer. Nor were there any interest rate risks that would justify an increase in the rate for the domestic countercyclical capital buffer. The statements concerning shock absorption capacity were purely hypothetical and were not substantiated. Finally, it was claimed that the rules-based component of the rate for the domestic countercyclical capital buffer – the credit-to-GDP gap – did not indicate any increase in the rate for the domestic countercyclical capital buffer.
II.
Re number 1:
The criteria for increasing the rate for the domestic countercyclical capital buffer to 0.25 per cent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013 are satisfied.
1. A condition for increasing the rate for the domestic countercyclical capital buffer under section 10d (3) sentence 2 of the KWG is the presence of cyclical systemic risk. This does not result explicitly from the national rules, but from the interpretation of the rules in the KWG and the SolvV.
Setting the rate for the domestic countercyclical capital buffer is governed by section 10d (3) sentence 2 of the KWG and section 33 (1) of the SolvV. Under these provisions, BaFin must consider the deviation in the ratio of domestic lending to the long-term trend as well as any recommendations by the Financial Stability Committee when setting the rate for the domestic countercyclical capital buffer. In addition, under section 7d of the KWG and section 33 (2) of the SolvV, BaFin must consider recommendations made by the European Systemic Risk Board. The national rules do not explicitly contain any additional requirements for setting the rate for the domestic countercyclical capital buffer.
The interpretation of national law, taking the requirements of European law into consideration, reveals the “cyclical systemic risk” criterion. The national rules governing the countercyclical capital buffer implement the requirements of Articles 130, 135 to 140 of the CRD, which are based in turn on the requirements set out in the rules issued by the Basel Committee of the Bank for International Settlements (“Basel III”).3 The background to the requirements is the assumption that excessive credit growth may cause system-wide risks. If the phase of excessive credit growth is followed by a downturn, the banking sector could experience substantial losses that could destabilise the banking sector. The aim is to counter this risk by requiring banks to build up a countercyclical capital buffer that they can release during times of crisis.4
Article 136 of the CRD contains more detailed requirements governing the setting of the rate for the domestic countercyclical capital buffer and is therefore significant for answering the question, which set of the criteria must apply when setting the rate for the domestic countercyclical capital buffer. Article 136(3) (a) to (c) of the CRD sets out that three elements must be taken into account when setting the rate for the countercyclical capital buffer:
- the buffer guide calculated in accordance with the requirements of Article 136(2) of the CRD (the calculation requirements were transposed into national law in section 10d (3) of the KWG and section 33 (1) of the SolvV in conjunction with sections 10d (5), 10 (1) sentence 1 no. 5 a) of the KWG),
- any current guidance by the ESRB in accordance with Article 135(1) (a), (c) and (d) of CRD IV and any recommendations issued by the ESRB on the setting of a buffer rate (the requirement to take into account the ESRB recommendations was transposed into national law in section 7d of the KWG in conjunction with section 33 (1) sentence 4 no. 2 and subsection (2) of the SolvV).
- other variables that the designated authority considers relevant for addressing cyclical systemic risk.
The wording “other” variables used in Article 136(3)(c) of the CRD shows that the European lawmakers view the buffer guide as the subset of the main variables for addressing cyclical systemic risk. “Cyclical systemic risk” is hence the high-level concept. Taking into account the requirements of European law and the historical origins, the national rules must also be interpreted in such a way that cyclical systemic risk is also decisive for setting the rate for the domestic countercyclical capital buffer.
2. Such a cyclical systemic risk is present.
a. The term “cyclical systemic risk” is not expressly defined in law, but based on the above it means the risk of disruption in the financial system which has the potential for serious negative consequences for the financial system and the real economy and which is based on a cyclical component (e.g. economic downturn).
Article 3(1) no. 10 of the CRD defines the term “systemic risk” as “a risk of disruption in the financial system with the potential to have serious negative consequences for the financial system and the real economy”.
In addition, this must bear a cyclical reference, which is not defined in any greater detail in the CRD. Interpreting the concept does reveal, however, that a systemic risk is a cyclical systemic risk if the risks can materialise due to a cyclical component, for example an economic downturn. That is because the countercyclical capital buffer serves to accumulate, during periods of economic growth, a sufficient capital base to absorb losses in stressed periods.5
Excessive credit growth is not an automatic condition for the presence of cyclical systemic risk. It is certainly the case that the countercyclical capital buffer is supposed to properly reflect the risk to the banking sector of excessive credit growth.6 It also happens that cyclical systemic risks accumulate in particular in phases of excessive credit growth because an economic downturn can lead to large losses in the banking sector in these cases and spark a vicious circle.7 Based on past experience, the existence of excessive credit growth is therefore a good indicator of cyclical systemic risk. However, because this indicator underpins the calculation of the buffer guide, and other factors that are significant in addressing cyclical systemic risk are also supposed to be taken into account, it is not solely decisive.
b. Cyclical systemic risk is determined on the basis of the Deutsche Bundesbank and BaFin methodological note described under I.
The decision on setting the rate for the domestic countercyclical capital buffer is thus based on the analysis of a range of indicators. 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 its long-term trend. A series of additional supporting indicators is 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. Ultimately, the rate for the domestic countercyclical capital buffer is set on the basis of a consideration of the overall picture.
aa) Viewed in isolation, the deviations in the ratio of domestic lending to the long-term trend to be considered under section 10d (3) sentence 3 of the KWG do not sufficiently indicate the presence of cyclical systemic risk that would warrant an increase in the rate for the domestic countercyclical capital buffer.
As described above, the credit-to-GDP gap has been narrowing continuously for some time. While it was still –2.00 percentage points in the second quarter of 2018, it rose to –0.22 by the first quarter of 2019. It is possible for the credit-to-GDP gap to indicate cyclical systemic risk in principle (inverse conclusion in Article 136 (3)(c) of the CRD, see above). In the first instance, however, the credit-to-GDP gap only forms the basis for calculating a buffer guide in accordance with the requirements of section 10d of the KWG, section 33 of the SolvV and Recommendation ESRB/2014/1, which were implemented using the method described in the methodological note. Based on the calculation methodologies described in detail in the methodological note, a minimum credit-to-GDP gap of 2.00 percentage points is required to result in a positive buffer guide. Based on the current figure for the credit-to-GDP gap, the buffer guide is currently 0 per cent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013. It therefore does not in itself serve as an indicator for increasing the rate for the domestic countercyclical capital buffer.
bb) The further variables to be considered according to the methodological note and Recommendation C.2 of ESRB/2014/1, however, suggest the presence of cyclical systemic risk.
In addition to the deviations in the ratio of domestic lending to the long-term trend, certain other variables are monitored that are referred to as supporting indicators in the methodological note and listed in detail on page 12 of the methodological note. Changes in the indicators are evaluated each quarter. The list can be accessed on BaFin’s website as described above.
An analysis of these indicators reveals that the increase in residential real estate prices has declined most recently to 4.58 per cent in the fourth quarter of 2018 compared with 5.12 per cent in the third quarter of 2018, but for 19 quarters, after all, the growth rate has been higher than the long-term average since 1991 of 2.87 per cent.
Additionally, the rate of growth in housing loans rose from 3.17 per cent in the fourth quarter of 2018 to currently 3.51 per cent in the first quarter of 2019. Growth in housing loans is therefore at its highest level since 2001.
In the first quarter of 2019, real growth in loans to non-financial corporations was 4.68 per cent and therefore lower than in the preceding quarter (5.14 per cent), but for 11 quarters has remained above the long-term average since 1991 of 1.99 per cent.
A large number of banking crises had their roots in wrong-headed developments in the real estate market, for example the subprime crisis. Rising real estate prices are a good early warning indicator of future banking crises.8 Paired with high growth in housing loans by historical standards, rising real estate prices increase the probability of future price adjustments. If real estate prices collapse and households experience losses in income due to an economic downturn, this can lead to growing loan defaults and higher loss given default ratios at the banks.
High growth in loans to non-financial corporations by historical standards may indicate excessive growth or undesirable developments in this area. In an economic downturn with growing default rates for corporate loans, this would lead to rising losses at the banks.
cc) In addition, the overall analysis contained in the explanatory remarks on the recommendation by the Financial Stability Committee, which takes further variables into account, verifies the presence of cyclical systemic risk. BaFin concurs with this overall analysis.
The recommendation by the Financial Stability Committee dated 27 May 2019 does not itself constitute either a main variable for addressing cyclical systemic risk, nor does it lead to an automatic increase in the rate for the domestic countercyclical capital buffer. However, under section 10d (3) sentence 3 of the KWG, the recommendation must be taken into consideration when setting the rate for the domestic countercyclical capital buffer.
BaFin re-examined the recommendation and the explanatory remarks and also evaluated them taking account of data that became available after the adoption of the recommendation by the Financial Stability Committee on 27 May 2019. For the details, please refer to the remarks in the Grounds under I. of this General Administrative Act.
BaFin therefore concurs in full with and endorses the substance of point B.II. of the explanatory remarks on the recommendation by the Financial Stability Committee. BaFin also shares the view that the overall analysis of all available variables indicates that cyclical systemic risk is currently present:
An analysis in isolation of changes in the credit-to-GDP gap already suggests that there is a build-up of cyclical systemic risk even though the credit-to-GDP gap has not yet currently reached the threshold at which, based on the legal requirements, a positive buffer guide indicates an increase in the rate for the domestic countercyclical capital buffer. The credit-to-GDP gaps using the national and standardised methods move dynamically in the direction of the threshold of two percentage points. Please refer to the description under I. for details. A positive buffer guide generally results above a threshold of two percentage points.
The following applies to the national method: assuming that credit growth corresponds to the current quarterly growth rate (1.14 per cent) and nominal GDP develops in accordance with the forecast by the International Monetary Fund9, this would result in a positive buffer guide in the third quarter of 2020, calculated according to the national method. If credit growth develops in line with average long-term credit growth (1.44 per cent – the average since 1968), a positive buffer guide would be indicated in the second quarter of 2020.
Using the standardised method, a positive buffer guide would actually already result in the next quarter (fourth quarter of 2019) if the standardised method assumes current quarterly credit growth (1.74 per cent) or average long-term credit growth (1.40 per cent – the average since 1968) and nominal GDP growth according to the forecast by the International Monetary Fund. The differences in credit growth compared with the national method are due in particular to the fact that a broad credit aggregate is used in the standardised method to measure the debt of the domestic private non-financial sector. In addition, the most recent credit aggregate for the standardised method is available for the fourth quarter of 2018,whereas the credit aggregate for the national method is already available for the first quarter of 2019.10
To the extent that the consultation resulted in criticism that the current calculations for the credit-to-GDP gap would not lead to a positive buffer guide, it should be noted that this does not mean that there can be no increase in the rate for the domestic countercyclical capital buffer. Rather – as described above – the decision on setting the rate for the countercyclical capital buffer follows the principle of “guided discretion” (as recommended by the European Systemic Risk Board, Recommendation ESRB 2014/1). In addition to the development of the credit-to-GDP gap, both further supporting indicators and other information currently considered to be relevant are taken into account in the decision. This means that the decision on the setting of the rate for the domestic countercyclical capital buffer is specifically not based merely on the rules-based component. Countercyclical capital buffers are also being increased in a number of other countries in the European Union without this being indicated by the rules-based component.
In addition, other aspects addressed in the recommendation by the Financial Stability Committee suggest the presence of cyclical systemic risk: there is a risk that the banks underestimate the credit risks. The positive economic development in recent years has resulted in falling credit risks and a corresponding decline in risk provisioning and in risk-weighted assets for market risks. Credit defaults could increase in the event of an economic downturn. In such a scenario, both risk provisioning and risk-weighted assets would rise, placing a burden on banks’ capital ratios.
A further factor is that residential property prices have been rising for some time and, according to the Deutsche Bundesbank, that there are considerable overvaluations in urban districts. There is a risk here that loan collateral has been overvalued. An economic downturn could result in defaults on residential real estate loans and an increase in loss given defaults when liquidating real estate collateral, thus placing a burden on banks’ capital ratios.
Contrary to the arguments asserted during the consultation, the domestic countercyclical capital buffer is expressly not set on the basis of assumptions about loosening lending standards. In its explanatory remarks on the recommendation dated 27 May 2019, the Financial Stability Committee argues solely on the basis of actual risks. Actual risks result from significant price increases in the past that, in the estimation of the Deutsche Bundesbank11 ,led to considerable overvaluations in urban districts. This results in substantial potential for setbacks. A general economic downturn and rising unemployment can lead to loan defaults. In such a scenario, banks that valued loan collateral too high in light of the aforementioned overvaluations run the risk of losses, since recoveries from loan collateral might not be sufficient to compensate for defaulted loans. This sub-risk is also addressed pre-emptively by raising the rate for the domestic countercyclical capital buffer. By contrast, the survey referred to in the consultation is aimed primarily at improving the supervisory data situation about lending standards. In BaFin’s view, the availability of data from the survey is therefore not decisive for substantiating the inventory risks and the use of capital-based measures.
Finally, the persistently low interest rates are contributing to the risk situation. This includes negative impacts on institutions’ income and an incentive to increase risk-taking on the one hand, as well as risks for funding costs and for the value of interest-bearing assets in the event of abrupt interest rate increases on the other hand.
To the extent that it was argued in the consultation that there were no interest rate risks that justify increasing the rate for the domestic countercyclical capital buffer, BaFin does not share this view. The explanatory remarks on the recommendation by the Financial Stability Committee state that the risks described, which are in some instances interdependent, collectively result in a scenario of a cyclical systemic risk.
The explanatory remarks on the recommendation by the Financial Stability Committee describe two possible interest rate scenarios that, when combined with the other risks, justify a cyclical systemic risk. They explain the scenario of an abrupt rise in interest rates on the one hand, and the scenario of a persistently low interest rate environment on the other. As explained above, persistently low interest rates are a drag on income from interest-based business and thus, over the longer term, on banks’ solvency as well. Additionally, weak earnings at banks give them an incentive, because of low interest margins, to increase their risk-taking and expand their lending in order to generate income. Such a scenario increases the risks to financial stability. In the case of the scenario of an abrupt rise in interest rates, funding becomes more expensive over the short to medium term, which can lead to an erosion especially in the value of fixed-rate assets.
Based on the risks described in the explanatory remarks on the recommendation by the Financial Stability Committee, BaFin holds the view that there are cyclical systemic risks that could impair financial stability. The increase of the countercyclical capital buffer is a preventive measure, based on the analysis of all available information in an overall assessment. As explained in the explanatory remarks to the recommendation, macroprudential measures are generally expected to have a preventive effect and hence strengthen the resilience of lenders to unexpected adverse events (shocks). The countercyclical capital buffer is thus a form of safety net in case the risks described above materialise, and its objective is to enhance the banks’ resilience.
The risks described above, some of which are interdependent, show that cyclical systemic risk is present.
If there is an economic downturn, there is a risk that banks will react with balance sheet measures if their loss absorbency is inadequate. If sufficient surplus capital is not available and if increasing capital through retained earnings or by borrowing from the market is not possible, curbs on lending to the real economy cannot be ruled out, especially if a number of affected institutions were to react in a similar way.
3. With regard to the calibration of the rate for the domestic countercyclical capital buffer at 0.25 per cent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013, BaFin concurs in full with and endorses point B.III. of the explanatory remarks on the recommendation by the Financial Stability Committee.
4. The increase in the rate for the domestic countercyclical capital buffer effective 1 July 2019 (applicable to the calculation of the institution-specific countercyclical capital buffer rate with effect from 1 July 2020) to 0.25 percent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013 is also proportionate.
As explained above, the increase in the rate for the domestic countercyclical capital buffer serves indirectly to strengthen the credit institutions’ capital base in times of economic growth, so that they have additional funds enabling them to absorb losses in stressed periods and hence serves to prevent the materialisation of system-wide risks.12
The increase in the rate for the domestic countercyclical capital buffer effective 1 July 2019 to 0.25 percent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013 is also appropriate for achieving this.
In the explanatory remarks on the recommendation, the Financial Stability Committee correctly observed that in particular no increase in microprudential minimum capital requirements can be considered for averting the risk to financial stability. In contrast to macroprudential buffers such as the countercyclical capital buffer, microprudential minimum capital requirements cannot be used by banks to absorb losses on a going-concern basis and are therefore not appropriate for achieving the objective.
BaFin also concurs with the statement in the explanatory remarks on the recommendation by the Financial Stability Committee dated 27 May 2019 that increasing microprudential minimum requirements is not an appropriate way of addressing cyclical systemic risk. It would be possible to adjust sectoral risk weights at least for the real estate sector via Articles 124 and 164 of the CRR. However, this would increase cyclical systemic risk in the short term – as described correctly in the explanatory remarks on the recommendation by the Financial Stability Committee dated 27 May 2019 – and additionally create wrong-headed incentives to shift lending business.
Furthermore, BaFin endorses the statements in the explanatory remarks on the recommendation by the Financial Stability Committee dated 27 May 2019 that it is not possible to capture cyclical systemic risks by means of an institution-specific Pillar 2 add-on. This is a microprudential instrument, not a macroprudential instrument and as such, is not aimed at cyclical systemic risk. Rather, an institution-specific Pillar 2 add-on aims at institution specific issues.
The increase in the rate for the domestic countercyclical capital buffer effective 1 July 2019 to 0.25 per cent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No. 575/2013 is also necessary to achieve the intended purpose. In line with the statements in the recommendation by the Financial Stability Committee dated 27 May 2019, BaFin does not see any milder but equally effective means.
Even if the approaches outlined above were to be suitable for addressing cyclical systemic risk, they would not impact the undertakings affected any less heavily. In order to address cyclical systemic risk using microprudential measures in a similar way to using macroprudential measures, the capital basis would also have to be strengthened in this case, with the result that the microprudential requirements would have to be calibrated overall to the same level. Besides, the consequences of breaching such a capital requirement would be potentially more serious than undershooting a capital buffer requirement.
The view was also advanced in the consultation that the target equity ratio already has a positive effect on financial stability because it is applied to all institutions. If this is meant to be an objection that an increase in the rate for the domestic countercyclical capital buffer is not necessary, BaFin does not concur with this view.
The target equity ratio is a soft microprudential capital requirement that does not have any direct legal effect. This capital requirement is calculated individually for each institution and should not therefore be confused with a macroprudential measure captured on a one-size-fits-all basis. Additionally, the countercyclical capital buffer is part of the combined buffer requirement (section 10i of the KWG) and therefore has direct legal consequences. For example, undershooting the combined capital buffer requirement automatically triggers dividend distribution restrictions.
It is also not necessary not to increase the rate for the domestic countercyclical capital buffer because many undertakings can already service the future additional capital (adequacy) requirements from surplus capital. As described in the preceding paragraph, the countercyclical capital buffer is part of the combined buffer requirement under section 10i of the KWG. By contrast, the institutions cannot be readily required under supervisory law to maintain capital over and above the legally stipulated own funds requirements.
Apart from that, no milder and equally effective means are apparent in order to address cyclical systemic risk.
Finally, increasing the rate for the domestic countercyclical capital buffer is also appropriate. Admittedly, the institutions concerned will be indirectly impacted by the measure because the rate for the domestic countercyclical capital buffer must be used to calculate the institution-specific countercyclical capital buffer rate under section 10d (2) of the KWG, and this means that the institutions concerned will have to comply with additional own funds requirements. However, according to BaFin’s findings, the institutions concerned will not be excessively burdened. As stated in the explanations in the Grounds under I. of this General Administrative Act, BaFin has performed calculations in this regard that have established that the additional own funds requirements can be borne overall by the institutions concerned, not least because they will have twelve months after the General Administrative Act is published to make any arrangements needed to comply with the additional own funds requirements. Furthermore, the burden on the institutions is counterbalanced by the prevention of severe risks to the financial system as a whole.
The concerns voiced in the consultation that the measure could have a procyclical effect do not affect the appropriateness of the measure. As explained in the explanatory remarks on the recommendation by the Financial Stability Committee, the German economy remains on a growth path, despite the current economic gloom. The explanatory remarks also set out that the appropriateness of the countercyclical capital buffer will be subject to quarterly review and that the buffer will be adjusted if necessary. This also applies to the twelve-month phase-in period for the countercyclical capital buffer. Consequently the rate for the domestic countercyclical capital buffer can be adjusted each quarter, enabling a quick response to potential negative developments.
However, BaFin continues to take the view that increasing the countercyclical capital buffer will increase the resilience of the banking system and hence reduce the probability of procyclical reactions by the banking system in an economic downturn scenario. It is not evident in the present situation that thebuild-up of additional capital will cause negative procyclical effects.
Re number 2
The initial application date was determined on the basis of section 10d (4) sentence 1 of the KWG. The period of 12 months results from section 10d (4) sentence 2 of the KWG.
Re number 3
The group of addressees results from section 10d (1) of the KWG and section 2 (9c), (9e), (9g) and (9h) of the KWG.
Re number 4
The timing of the announcement is based on section 17 (2) of the Act Establishing the Federal Financial Supervisory Authority (Gesetz über die Bundesanstalt für Finanzdienstleistungsaufsicht – Finanzdienstleistungsaufsichtsgesetz – FinDAG) in conjunction with section 41 (4) sentence 4 of the Administrative Procedure Act (Verwaltungsverfahrensgesetz – VwVfG).
Instruction on available remedies
Objections to this notice can be submitted to the Federal Financial Supervisory Authority in Bonn or Frankfurt am Main within one month of its announcement.
Raimund Röseler
This translation is furnished for information purposes only. The original German text is binding in all respects.
Footnotes
- 1 On the one hand, the national method for calculating the credit-to-GDP gap only considers loans by domestic MFIs (banks and money market funds) to the non-financial sector, and on the other, the buffer guide is not increased if the annual GDP growth rate is negative (i.e. there is a recession). The reason for the first modification is the long history of the MFI credit time series (back to 1968) and the availability of data adjusted for statistical breaks (e.g. German reunification). The idea behind the second modification is not to increase the buffer guide in an economic downturn and thus curb lending in such a phase.
- 2 IMF Mission Concluding Statement 17 May 2019 https://www.imf.org/en/News/Articles/2019/05/17/Germany-Staff-Concluding-Statement-of-the-2019-Article-IV-Mission
- 3 see “Basel III: A global regulatory framework for more resilient banks and banking systems”, paragraph 136 et seq.
- 4 see “Basel III: A global regulatory framework for more resilient banks and banking systems”, paragraph 136; Recitals 79 to 82 of the CRD.
- 5 see Recital 80 of the CRD.
- 6 see Recital 81 of the CRD
- 7 see also Recital 1 of ESRB/2014/1.
- 8 see e.g. Mian and Sufi (2014), House of Debt, University of Chicago Press; Detken et al. (2014), Operationalising the Countercyclical Capital Buffer: Indicator Selection, Threshold Identification and Calibration Options, ESRB Occasional Paper Series, No. 5, June 2014; Roy and Kemme (2011), What is Really Common in the Run-up to Banking Crises? Economics Letters, Vol. 113, pages 211-214; Barrell et al. (2010), Bank Regulation, Property Prices and Early Warning Systems for Banking Crises in OECD Countries, Journal of Banking and Finance, Vol. 34, pages 2255–2264.
- 9 IMF World Economic Outlook Database, April 2019
- 10 see methodological note, page 15.
- 11 Deutsche Bundesbank, Monthly Report February 2019, page 57.
- 12 see Recital 80 of the CRD.