Macroprudential instruments are designed to preventively strengthen the financial systems resilience to financial stability risks. In this way, they help to ensure that the financial system performs its functions smoothly at all times, even during periods of stress. Macroprudential instruments include various capital buffers. In addition, instruments designed to contain the emergence of systemic risks in the residential property market are also available in Germany.
In Germany, BaFin is the authority that orders the specific use of instruments. It acts partly at the recommendation of Financial Stability Committee and partly on its own initiative. The Financial Stability Committee reviews on an ongoing basis whether existing instruments are sufficient or whether they need to be amended.
The following chart summarises the most important macroprudential instruments and the systemic risks they address.
Macroprudential capital buffers were introduced for the first time in the European Union on the basis of the Basel III reform package. They are intended to strengthen the resilience of the financial system.
The Basel Committee on Banking Supervision (BCBS) developed four capital buffers based on the proposals of the Financial Stability Board (FSB). The European Union (EU) introduced the systemic risk buffer as an additional requirement for European banks.
The capital buffers are:
- Capital conservation buffer (CCoB)
- Countercyclical capital buffer (CCyB)
- Systemic risk buffer (SyRB)
- Capital buffer for global systemically important institutions (G-SIIs)
- Capital buffer for other systemically important institutions (O-SIIs)
These five buffers are enshrined in the European Capital Requirements Directive (CRD) and have been transposed in Germany by means of the Banking Act (Kreditwesengesetz). The buffer requirements must be met with Common Equity Tier 1 Capital (CET 1), and they apply in addition to the minimum capital requirements (see overview). In contrast to the minimum capital requirements, buffers can fall short of the requirements in periods of stress. The respective national supervisory authority must involve the European Central Bank in macroprudential measures within the scope of the Single Supervisory Mechanism (SSM).
The amounts for currently applicable capital buffer requirements are shown in the table below. In addition, the European Systemic Risk Board (ESRB) website contains an overview of capital buffers for individual European countries. The Basel Committee maintains similar lists related to the G-SII buffer and CCyB at the global level, including relevant third countries.
Additional capital buffers enable banks to better absorb losses. Capital buffers can be distinguished according to the extent to which their purpose is to increase banks’ resilience to cyclical or structural vulnerabilities. Capital buffers intended to counter cyclical vulnerabilities should be built by banks at an early stage during economically good times, i.e. when cyclical systemic risks are low but rising, so that they are available in times of crisis. The release of buffers during times of crisis is intended to prevent banks from excessively restricting lending to the real economy during the crisis in order to meet their capital requirements. In this way, capital buffers have a countercyclical effect. In particular, this category of capital buffers includes the CCyB. Its amount can be varied by BaFin depending on the risk environment. Unlike the CCyB, the CCoB level does not fluctuate over time, but rather is fixed by law and therefore constant. Nevertheless, the CCoB, like the CCyB, can be utilised in periods of stress to absorb losses and stabilise lending by permitting buffers to fall below required levels. The legal consequences of falling below this threshold are set out in section 10i of the Banking Act.
Capital buffers that increase resilience to structural vulnerabilities relate to the characteristics of the financial system that are conducive to direct or indirect contagion effects, e.g. because market participants are too big (“too big to fail”) or too interconnected (“too interconnected to fail”), or because too many market participants take on similar risks (“too many to fail”). This category of capital buffers includes the G-SII buffer, the O-SII buffer and the systemic risk buffer (SyRB).
The requirements for compliance with capital buffers differ from the minimum capital requirements. If a bank falls below the minimum capital requirements, its banking license can be withdrawn, i.e. its permission to conduct banking business is revoked. However, if a bank falls below the combined capital buffer requirements as set out in section 10i of the Banking Act, this results in a restriction on dividend or bonus distributions, among other things. However, the bank’s permission to conduct banking business is not revoked, and the bank may continue its business activities. In addition, the bank must prepare a capital plan in which it describes to the supervisory authority how it intends to rebuild its capital buffer. The combined capital buffer requirements comprise the requirements for the countercyclical capital buffer, the G-SII buffer, the O-SII buffer, the systemic risk buffer, the capital conservation buffer and the Pillar 2 Guidance buffer.