A. Questions regarding the setting of the national buffer rate

A1. Which authority sets the domestic (German) countercyclical capital buffer rate, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht –BaFin) or the European Central Bank (ECB)?

As a matter of principle, the countercyclical capital buffer rate to be applied for institutions that are under both direct and indirect supervision by the ECB is set by BaFin; in setting the countercyclical capital buffer rate, BaFin takes into consideration any recommendations made by the Financial Stability Committee and by the European Systemic Risk Board (sections 7d, 10d (3) of the German Banking Act (Kreditwesengesetz – KWG), section 33 (2) of the German Solvency Regulation (Verordnung zur angemessenen Eigenmittelausstattung von Instituten, Institutsgruppen, Finanzholding-Gruppen und gemischten Finanzholding-Gruppen – SolvV)). However, the ECB must be informed of the rate to be set so that any objections by the ECB to the proposed rate may be taken into consideration. Furthermore, the ECB has the option, under certain circumstances, of setting stricter requirements than those set by BaFin (Article 5 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)).

A2. How often does Germany’s banking supervisor analyse credit growth in Germany?

BaFin reviews the suitability of the countercyclical capital buffer rate on a quarterly basis together with the Bundesbank and taking any recommendations made by the Financial Stability Commission (FSC) into account. Alongside the primary indicator “credit-to-GDP gap”, all of the indicators specified in the analytical paper on the countercyclical capital buffer are also considered. Additional information that is regarded as relevant at the respective time may also be included in the analysis.

A3. In addition to the “credit-to-GDP gap” (deviation in the ratio of credit to GDP from the long-term trend) proposed by the Basel Committee, are further indicators taken into consideration in the assessment of the credit cycle and with regard to the German economy in connection with the setting of the domestic rate?

Indicators that are taken into consideration in the setting of the rate for Germany alongside the primary indicator “credit-to-GDP gap” are detailed in the analytical paper on the countercyclical capital buffer erläutert. Furthermore, additional aspects that are regarded as relevant at the respective time may also be included in the assessment of cyclical risks.

B. Basic principles regarding the application and calculation of the institution-specific countercyclical capital buffer

B1. How do institutions determine the capital requirements for the countercyclical capital buffer and what information must be disclosed?

The capital requirement for the institution-specific countercyclical capital buffer is determined by multiplying the percentage of the institution-specific countercyclical capital buffer with the total risk exposure amount in accordance with Article 92(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 646/2012 (Text with EEA relevance) (Capital Requirements Regulation – CRR)). The capital requirement must be held in Common Equity Tier 1 capital (section 10d (1) of the KWG).

The institutions determine the percentage for the institution-specific countercyclical capital buffer in accordance with section 10d (2) of the KWG as the weighted average of the countercyclical buffer rates in the countries in which the institution's relevant exposures are located. Section 36 of the SolvV defines relevant exposures, which primarily consist of exposures towards the private sector.

In order that these relevant risk positions can be weighted with the countercyclical capital buffer for the respective geographical location, the geographical location of all relevant exposures must be determined in accordance with Commission Delegated Regulation (EU) No 1152/2014 of 4 June 2014. Institutions must disclose the geographical distribution of the relevant exposures and the calculated amount of the institution-specific countercyclical capital buffer (Article 440 of the CRR in conjunction with Commission Delegated Regulation (EU) No 1555/2015 of 28 May 2015).

B2. Is there a difference between the term “relevant exposures” (maßgebliche Risikopositionen) used in section 10d of the KWG and the term “relevant credit exposures” (wesentliche Kreditrisikopositionen) used in Article 140 of the CRD?

The KWG differs from the CRD IV only in terms of terminology through its use of “relevant exposures” (maßgebliche Risikopositionen) in place of “relevant credit exposures” (wesentliche Kreditrisikopositionen). The term “relevant exposures” (maßgebliche Risikopositionen) is defined more precisely under section 36 of the SolvV and corresponds to the definition of “relevant credit exposures” (wesentliche Kreditrisikopositionen) under Article 140(4) of the CRD.

B3. When do the countercyclical capital buffers set by other member states or third countries need to be applied by German institutions?

The countercyclical buffer rates that apply in other States of the European Economic Area and in third countries must, in accordance with section 10d (2) in conjunction with (6) sentence 2 of the KWG, be applied by the institutions authorised in Germany in the calculation of the institution-specific countercyclical capital buffer up to a buffer rate of 2.5% (legal reciprocity) where relevant exposures of the institution are located in the respective country. Foreign rates exceeding 2.5% need only be taken into account in the calculation of the institution-specific countercyclical capital buffer where this higher buffer rate has been recognised by BaFin. Until this rate has been recognised by BaFin, a buffer rate of a maximum of 2.5% must be applied to the relevant exposures in the country concerned (section 10d (6) of the KWG).

It must be ensured that the principle of legal reciprocity does not only apply to the buffer rate but generally also to the rules regarding its application as stipulated by the foreign authorities.

B4. Does the weighted average (for the calculation of the institution-specific countercyclical capital buffer) include only relevant exposures located in countries for which a rate greater than zero has been set?

All relevant exposures within the meaning of section 36 of the SolvV must be included in the calculation of the institution-specific countercyclical capital buffer, including those located in countries for which a rate of 0% has been set (section 10d (2) sentence 2 of the KWG). Such exposures are to be taken into account in the calculation of the institution-specific rate at 0%.

B5. What is the procedure in the case of third countries that have not defined and published a countercyclical capital buffer rate?

Where the competent authority of a third country has not defined and published a countercyclical buffer rate, BaFin may determine the rate which the institutions authorised in Germany must apply when calculating the institution-specific countercyclical buffer for the exposures located in that country (section 10d (7) of the KWG). BaFin may set the buffer rate, for example, where the rate set by the competent authority of the third country is assessed as being insufficient to protect the institutions to an appropriate extent from the risks of excessive credit growth in the third country concerned.

In setting the buffer rate, BaFin must take the recommendations of the European Systemic Risk Board (ESRB) into account as appropriate. Furthermore, BaFin informs in particular the ECB of its intention to set a buffer rate for a third country so that it can take the opinions of the ECB into account in setting the rate.

In the event that BaFin sets a rate for a third country, this is published as a general administrative act on the BaFin website.

Where BaFin does not make use of the option to set the buffer rate, the relevant exposures located in the third country must be included in the calculation of the institution-specific rate at 0%.

B6. Are the countercyclical capital buffer rates set by other member states or third countries published on a central platform?

On their websites, the European Systemic Risk Board (ESRB) and the Basel Committee on Banking Supervision (BCBS) publish overviews of the countercyclical capital buffer rates set by individual countries.

However, these publications are not legally binding and do not claim to be exhaustive. As a matter of principle, each institution must itself check whether the competent authorities of the country in which it holds relevant credit exposures within the meaning of section 36 of the SolvV have set a countercyclical capital buffer rate.

B7. Is BaFin planning to provide explicit clarification regarding the buffers applied in other countries?

Under section 10d (9) of the KWG, explicit clarification regarding foreign buffer rates is necessary when

• BaFin recognises a foreign rate above 2.5%. Rates of up to 2.5% must be taken into account by institutions authorised in Germany and do not require an administrative decision by BaFin.
• BaFin increases a rate set by a foreign authority.
• BaFin sets a rate for a third country because the country in question has not set a rate.

B8. Is it necessary to disclose relevant credit exposures within the meaning of Commission Delegated Regulation (EU) 2015/1555 (geographical distribution by country) where the countercyclical capital buffer rate for the country in which the risk exposure is located is 0%?

With a view to fulfilling the requirements of Article 440(1)(a) of the CRR, the geographical breakdown of relevant credit exposures should be disclosed even when the applicable countercyclical capital buffer rate for a country is zero (see also Recital (4) of Commission Delegated Regulation (EU) 2015/1555).

C. Detailed questions regarding the application and calculation of the institution-specific countercyclical capital buffer

C1. Are institutions authorised in Germany required to apply the counter-cyclical capital buffer for Switzerland in the calculation of the institution-specific countercyclical capital buffer?

Under Article 440 of the CRR, institutions are required to disclose the geographical distribution of the credit exposures relevant for the calculation of the countercyclical capital buffer. This geographical distribution is necessary for the calculation of the institution-specific countercyclical capital buffer rate (section 10d (2) of the KWG). This means that, as a matter of principle, each individual relevant exposure must be allocated to a country (geographical location).

However, this obligation for reciprocal application only applies where the foreign buffer is a countercyclical capital buffer within the meaning of the CRD. This means that the buffer must be consistent with the rules of the CRD both in terms of its meaning and purpose and in terms of the concrete application and calculation of the capital requirements.

The countercyclical capital buffer currently applicable in Switzerland deviates from the provisions under the CRD in particular with regard to the application and calculation of capital requirements. Institutions authorised in Germany are therefore not required to apply it in their calculation of the institution-specific countercyclical capital buffer.

C2. How are CIU exposures (exposures in the form of units or shares in collective investment undertakings, Article 112(o) of Regulation (EU) 575/2013 – CRR) to be taken into account in the calculation of the institution-specific countercyclical capital buffer?

Under Article 440 of the CRR, institutions are required to disclose the geographical distribution of the credit exposures relevant for the calculation of the countercyclical capital buffer. This geographical distribution is necessary for the calculation of the institution-specific countercyclical capital buffer rate (section 10d (2) of the KWG). This means that, as a matter of principle, each individual relevant exposure must be allocated to a country (geographical location).

CIU exposures are also considered relevant exposures (Article 140(4) of the CRD in conjunction with Article 112(o) of the CRR). Institutions are therefore required to allocate these exposures to a geographical location, too. For CIU exposures, the geographical location is primarily determined on the basis of Article 2 of Commission Delegated Regulation (EU) No 1152/2014 of 4 June 2014.

In accordance with this, the geographical location is generally the location of the obligor of the underlying exposure which is determined using a look-through approach. If the CIU exposure includes several obligors for the underlying exposures with different geographical locations, the largest underlying exposure may be used as the basis.

If the exposure underlying the CIU exposure cannot be identified based on information existing internally or available externally without disproportionate effort, then the CIU exposure may be allocated to the home Member State of the institution. The institution is responsible for providing evidence of the disproportionate effort associated with concrete allocation.

As a result, CIU exposures are then included in the calculation of the institution-specific capital buffer rate with the countercyclical capital buffer rate of the geographical location to which they have been allocated.

C3. How is the geographical location of “ship financing” exposures determined?

Where ship financing constitutes the financing of physical assets and is therefore a sub-class of specialised lending exposure within the meaning of Article 147(8) of the CRR, then it is allocated to the location of the income (Article 2(3) of Commission Delegated Regulation (EU) No 1152/2014 of June 2014). The location of the income is determined according to the economic location of the borrower; this is determined according to the registered office of the management and/or the location of key cash flows.

C4. In what circumstances will ad hoc calculation requirements within the meaning of Article 3(4) of Commission Delegated Regulation (EU) No 1152/2014 of 4 June 2014 be triggered?

The ad hoc calculation requirements are relevant to institutions that make use of the simplified method for determining the geographical location for trading book positions.
In accordance with this, institutions whose total trading book exposures do not exceed 2% of their total general credit, trading book and securitisation exposures, may allocate these exposures to the home Member State of the institution. This means the institutions may take these trading book positions into account using the buffer rate of their home country in the calculation of the institution-specific countercyclical capital buffer (Article 3(3) of Commission Delegated Regulation (EU) No 1152/2014).

However, in order to make use of this simplified method for determining the geographical location, the institutions must be able, on an ad hoc basis, to calculate and maintain the percentage of their exposures in the trading book at all times. An ad hoc calculation is therefore also required when an event that affects the financial or economic situation of the institution occurs. This is because institutions that make use of this privilege must guarantee the 2% limit is maintained at all times, even in stress situations.

C5. Are covered bonds considered relevant exposures?

Relevant exposures within the meaning of section 36 of the SolvV include all credit risk exposures that cannot be allocated to any of the exposure classes under Article 112(a) to (f) of the CRR.

Bonds in accordance with Article (52)(4) of Directive 2009/65/EC (covered bonds) that meet the requirements of Article 129 of the CRR cannot be allocated to any of the exposure classes under Article 112(a) to (f) of the CRR because they constitute their own exposure class in accordance with Article 112(l) of the CRR. They are therefore considered relevant credit risk exposures within the meaning of section 36 of the SolvV (Article 140(4) of the CRD)..

C6. Method for calculating the counter-cyclical capital buffer: relevant exposures – market risk positions. Do market risks also have to be taken into consideration in the calculation of the institution-specific countercyclical capital buffer for counterparties that are allocated to the exposure classes under Article 112(a) to (f) of the CRR? I.e. does the limitation as regards exposure classes only apply with regard to credit risk (see also section 36 (1) of the SolvV)?

Market risk positions must be taken into account in the calculation of the institution-specific countercyclical capital buffer if they relate to exposure classes that do not fall under the scope of Article 112(a) to (f) of the CRR and if they are trading book positions that are subject to the rule regarding own funds requirements specified under section 36 (1) nos. 1 to 3 of the SolvV.

C7. Under Article 2(5)(b) of Commission Delegated Regulation (EU) No 1152/2014, foreign exposures whose aggregate does not exceed 2% of the aggregate of the general credit, trading book and securitisation exposures of that institution may be allocated to an institution's home Member State. Does the de minimis threshold of 2% apply to each individual country or to the sum of all relevant credit risk exposures outside the home country?

The exemption under Article 2(5)(b) of Commission Delegated Regulation (EU) No 1152/2014 relates to the overall credit risk from an institution’s aggregate foreign exposure.

Institutions may only make use of the above exemption and allocate their foreign exposures to the home country of the institution (i.e. Germany for German institutions) if the overall credit risk from all foreign exposures does not exceed 2% of the total derived from general credit risk exposures, trading book exposures and securitisation exposures. The exemption is intended to alleviate the burden for institutions with limited foreign overall exposures or limited trading book activity (see also Recital 8 of Commission Delegated Regulation (EU) No 1152/2014).