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 April 2020, the rate for the domestic countercyclical capital buffer is reduced to 0 per cent of the total risk exposure amount determined in accordance with Article 92(3) of Regulation (EU) No.575/2013¹.

2. No potential increase in the domestic countercyclical capital buffer is envisaged before 1 January 2021.

3. The General Administrative Act is addressed to institutions as defined in section 1 (1b) of the Banking Act 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. This General Administrative Act is deemed to be announced on the day following its publication (1 April 2020) and, from that date, supersedes the previous BaFin General Administrative Act of 28 June 2019, ref. no. R 1-AZB 1134-2019/0001, regarding the increase in 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.

Grounds:

I. Situation

1. Background to the domestic countercyclical capital buffer

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 (Capital Requirements Directive – CRD , OJ L 176 of 27 June 2013, page 338).

The aim of the countercyclical capital buffer is to make the banking sector more resilient in the face of systemic risks associated with the credit cycle. It is designed to be activated in the event of excessive credit growth. During a phase of system-wide stress the buffer can be reduced immediately or tapped in order to cover losses. In this way, the countercyclical capital buffer can help to prevent banks from unduly restricting the supply of credit during times of stress, which might otherwise hinder a cyclical recovery (The countercyclical capital buffer in Germany – Analytical framework for the assessment of an appropriate domestic buffer rate, referred to in the following as the "methodological note”²).

Effective 1 January 2016, BaFin set the rate for the domestic countercyclical capital buffer at 0 per cent in the first instance.

Based on a recommendation by the Financial Stability Committee (FSC), BaFin increased this rate to 0.25 per cent by means of a General Administrative Act of 28 June 2019. In doing so, it not only considered the buffer guide but also, in an overall assessment, other indicators that can be found in detail in the methodological note³.

In line with the requirements of section 10d (3) sentence 2 of the KWG, the domestic countercyclical capital buffer rate is assessed every quarter, with an assessment pending for the 2nd quarter of 2020.

2. Current situation in the real economy and on the financial markets

Events in connection with the outbreak and continued spread of COVID-19 in Germany have developed dynamically in recent weeks. A range of measures have been taken to slow down the further spread of COVID-19. Examples of these measures include the nationwide closure of schools and, the imposition of lockdowns and social distancing, as well as the closure of certain businesses.

It is too early to predict whether the measures that have been taken will be enough to contain the spread of the virus, or if further, possibly more far-reaching measures will be necessary. It cannot be estimated how long the measures will have to be maintained.

These measures are having a considerable impact on public life and hence on the real economy. Because the duration and extent of the necessary measures cannot yet be predicted, their impact on the real economy cannot be estimated with any degree of accuracy and is marked by a high level of uncertainty. However, it can be expected that economic growth will slow to a significant extent, at least temporarily. In its March 2020 Monthly Report, the Bundesbank presumes that a pronounced recession in Germans is unavoidable⁴.

This high level of uncertainty is reflected in the financial markets. The major stock indices both in Germany and abroad fell significantly over the course of March 2020. The financial market indicators used to set the countercyclical capital buffer, in particular CDS spreads for German banks and the monthly financial stress indicator, have risen and underscore the tensions on the financial markets.

3. Measures to mitigate financial market stress

Governments, supervisory authorities and central banks across Europe have instituted coordinated wide-ranging monetary policy, fiscal policy and prudential measures in order to alleviate the economic effects. These include lending programmes, monetary policy measures and reliefs in supervisory practice.

The Basel Committee on Banking Supervision is supporting the application of measures by the supervisory authorities and has drawn attention to the option to use buffers in stress phases to absorb losses and support the real economy⁵.

On 12 March 2020, the ECB drew attention in a press release to the ability of banks to fully use buffers and expressed the view that the national authorities can support the other measures by relaxing the countercyclical capital buffer.⁶

The FSC also discussed lowering the countercyclical capital buffer and welcomed this intention⁷.

II. Formal requirements of the General Administrative Act

The General Administrative Act is based on section 10d (3) in conjunction with section 5 of the KWG.

Under section 10d (3) of the KWG, BaFin is responsible for assessing and setting the domestic countercyclical capital buffer, which includes reducing it.

No consultation with the institutions concerned was necessary before publishing the General Administrative Act because reducing the domestic countercyclical capital buffer to 0 per cent does not constitute any infringement of rights within the meaning of section 28 (1) of the VwVfG.

III. Material requirements of the General Administrative Act

Under section 10d (3) sentence 2 of the KWG, the domestic countercyclical capital buffer rate is set and assessed every quarter, hence as at the 2nd quarter of 2020. In doing so, 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.

1. Setting an appropriate rate

The domestic countercyclical capital buffer rate is designed to enable relevant institutions to absorb losses in stressed periods.⁸ Among other things, this is supposed to contribute to financial stability.

As a general principle, the buffer guide is used to set the countercyclical capital buffer rate in line with section 10d (3) sentence 3 of the KWG in conjunction with section 33 (1) of the Solvency Regulation (Solvabilitätsverordnung – SolvV). In normal circumstances, it should reflect the credit cycle and the risks due to excess credit growth in Germany, and take into account the specific economic conditions within the jurisdictional reach of the KWG. The buffer guide 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 calculated in two different ways.⁹ The buffer guide for the 4th quarter of 2019 calculated using the national method is 0 per cent, and 1.26 per cent for the 3rd quarter of 2019 using the standardised method.

However, the buffer guide is not a suitable indicator for capturing the specific current situation, especially in any decision on whether to promptly release the buffer in stress periods on the financial markets. The reason for this is in particular that data about the ratio of credit-to-GDP used as the basis for the buffer guide is only available after a significant time has elapsed. What that means is that ongoing stress periods that emerge relatively quickly, as in the present case, are only captured with a time lag. In situations like this, other indicators come to the fore, especially financial market indicators such as the EURIBOR-OIS spread or the CDS spread for German banks, which are available virtually without any delay on a daily basis.¹⁰

The ongoing economic developments attributable to the present situation relating to the COVID-19 pandemic point to considerable stress in the German financial and economic system in this respect. This is evident, for example, from the CDS spreads for German banks or the Bundesbank’s monthly financial stress indicator¹¹, which indicate tensions in the financial markets. Based on an overall assessment, in turn, these indicators lead to the conclusion to reduce the countercyclical capital buffer.

Even though the countercyclical capital buffer set at 0.25 per cent by the General Administrative Act of 28 June 2019 would only have been applicable from 1 July 2020, it can be assumed that the institutions concerned have, in part, already built up capital at an early stage in order to be able to duly meet this requirement from 1 July 2020. Reducing the buffer also cuts the prospective capital requirements applicable to the institutions and thus gives them further room for manoeuvre.

In the current situation, releasing capital by reducing the domestic countercyclical capital buffer is designed to enable the banks to quickly use the freed-up capital to absorb potential losses and thus continue to provide the loans needed by the real economy. This will mitigate procyclical effects and enhance financial stability.

Reducing the countercyclical capital buffer is thus advisable because of the current stress period, and is also likely to make the desired contribution to financial stability as well as to stabilising the real economy.

2. Need for and appropriateness of the rate

Reducing the domestic countercyclical capital buffer to 0 per cent is both necessary and appropriate.

In the context of the current negative developments on the financial markets, reducing the domestic countercyclical capital buffer rate is one measure out of many that is likely to help ease the current situation. In this respect, it constitutes one component of a package of measures to enhance financial stability.

Capital buffers are accumulated specifically to be available in stress periods. In the sort of stress period, we are currently experiencing, reducing domestic capital buffers, and hence also the domestic countercyclical capital buffer, must correspondingly be contemplated as a matter of priority before other, more far-reaching measures can be deployed. As a general principle, an alternative course of action could be to keep the requirement for institutions to maintain a countercyclical capital buffer of 0.25 per cent unchanged, but to allow them to use this capital as a temporary measure. However, such an approach only makes sense if, on the one hand, it is foreseeable that the stress period will be very short, or on the other, the stress period only affects isolated institutions. As already explained, neither of these conditions apply, based on current estimates, so this option cannot be applied in the present circumstances. In this respect, reducing the countercyclical capital buffer constitutes the least severe means of achieving the stated purpose.

In addition, the institutions concerned are neither burdened nor restricted by the reduction. Lowering the domestic countercyclical capital buffer aims to enhance financial stability in the context of the current environment. The institutions’ minimum capital requirements, and hence also their fundamental resilience, are not affected by the reduction in the buffer. On the contrary: in the situation prevailing today, it aims to enable the banks to quickly use the freed up capital to absorb potential losses and thus continue to provide the loans needed by the real economy. Reducing the countercyclical capital buffer is also appropriate in this respect. Based on this assessment, reducing the domestic countercyclical capital buffer is advisable.

Because the domestic countercyclical capital buffer rate was most recently set at 0.25 per cent and, under section 10d (3) of the KWG, changes can only be made in increments of 0.25 per cent, only a complete reduction to 0 per cent can be considered at present.

3. Recommendation by the Financial Stability Committee

Undender section 10d (3) sentence 3 of the KWG, any recommendations by the FSC must be taken into account when setting the domestic countercyclical capital buffer rate. There is not currently any corresponding formal recommendation by the FSC. However, the FSC has discussed lowering the countercyclical capital buffer and announced that it welcomes such this approach.r section 10d (3) sentence 3 of the KWG, any recommendations by the FSC must be taken into account when setting the domestic countercyclical capital buffer rate. There is not currently any corresponding formal recommendation by the FSC. However, the FSC has discussed lowering the countercyclical capital buffer and announced that it welcomes such this approach.

4. Period during which no increase in the domestic countercyclical capital buffer can be expected.

Because the long-term impact of the COVID-19 pandemic cannot yet be predicted, it appears appropriate to leave the domestic countercyclical capital buffer rate at 0 per cent until 31 December 2020 in the first instance. This period was chosen in order to take account of the uncertainty about how long the crisis will last and to be able to react flexibly if required. In particular, it remains to be seen whether the economic downturn constitutes a long-term trend and whether the financial support measures announced by the government will have an immediate impact. Because Germany has no experience with the negative effects of such a pandemic on the real and the financial economy, the further economic development up to 31 December 2020 will be monitored. Sufficient information should then be available to enable a further informed assessment.

Taking these factors into account, setting a time limit of 31 December 2020 is appropriate.

BaFin will monitor the situation continuously and will assess the buffer every quarter, as before. BaFin notes that, under section 10d (5) sentence 2, it can also increase the domestic countercyclical capital buffer before 31 December 2020.

Instruction on available remedies

Objections to this General Administrative Act can be submitted to the Federal Financial Supervisory Authority in Bonn or Frankfurt am Main within one month of its announcement.

Hufeld

Footnotes: