Topic Own funds Countercyclical capital buffer
The countercyclical capital buffer is a macro-prudential banking supervisory tool intended to counteract the risk of excessive credit growth in the banking sector. The legal bases for the buffer are set out, in particular, in Articles 130 and 135 to 140 of the Capital Requirements Directive (CRD IV), which has been transposed into German law by virtue of section 10d of the German Banking Act (Kreditwesengesetz – KWG) in conjunction with section 64r of the KWG.
BaFin has set the value of 0 % for the domestic countercyclical capital buffer with the general decree dated 28 December 2015.
rdIn general, macro-prudential tools enable the competent authorities to take legal supervisory measures to ensure financial stability. In the specific case of the countercyclical capital buffer, the intention is to counteract the risk of excessive credit growth in the banking sector. The idea behind the countercyclical capital buffer is that 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. The buffer is explicitly used up in times of crisis and used to mitigate losses. As a result, it should be possible to avoid the creation of 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 about setting the buffer is based on an analysis of a variety of factors. In particular 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, plays a decisive role.
Institution-specific countercyclical capital buffer
Institutions must factor the relevant value for Germany into their calculations for the institution-specific countercyclical capital buffer, applying the total significant credit risk exposures in Germany.
Institutions that have significant risk exposures in other countries must factor in the countercyclical capital buffer applicable in those countries on a pro rata basis. Significant credit risk exposures include all credit risk exposures specified in section 36 of the German Solvency Regulation (Solvabilitätsverordnung – SolvV), i.e., basically all exposures to 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) in their common equity tier 1 capital.
These additional capital requirements of the countercyclical capital buffer are applicable from 1 January 2016. In the ramp-up phase, the institution-specific countercyclical capital buffer amounts to:
- no more than 0.625% in 2016,
- 1.25% in 2017 and
- 1.875% in 2018.
Beginning on 1 January 2019, the requirements must be met in full.
Current buffer in Germany and supplemental information
BaFin has set a countercyclical capital buffer of 0% for Germany as at 1 January 2016. BaFin is to review that decision every quarter. Based on the current data, the review has shown that the value of 0% is appropriate for third quarter of 2018 too, which is why there are no intentions to change it for the time being. The Deutsche Bundesbank provides a detailed description of how to determine an appropriate countercyclical buffer in a published Analytical paper.
The decision is based on the following results:
The credit-to-GDP gap calculated under the national method is currently -3.32 percentage points (Q4 2017). This implies a buffer guide of 0%. The credit-to-GDP gap has narrowed some more from -3.47 percentage points in Q3 2017 and -3.79 percentage points in Q2 2017 but is still significantly below 2%. If the credit-to-GDP gap exceeds 2%, the buffer guide would be greater than zero. A buffer guide of 0% is also confirmed using the standardised method under Basel III. Under the standardised method, the credit-to-GDP gap for the most recently available quarter is -3.34 percentage points (Q3 2017).
Credit-to-GDP ratio, trend and gap
Taken as a whole the indicators do not currently reveal any need to deviate from the buffer guide. Accordingly, BaFin has kept the value of 0% for the countercyclical capital buffer applicable for the third quarter of 2018.
You can find the values and descriptions of all indicators taken into account here.
Overview – Historical capital buffers
|Applicable from||Capital buffer||Published on|
|1 January 2016||0 %||15 December 2015|