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 countercyclical capital buffer (CCyB) is designed to preventively strengthen the financial system’s resilience to cyclical risks. The CCyB amount is based on the level of cyclical systemic risk within the financial system. Determining this involves analysing whether and to what extent lending trends are moving counter to the economic cycle. During good times (when cyclical systemic risks are low but rising), banks should build up additional capital with which they can absorb losses during bad times. In this respect, the countercyclical capital buffer is a cyclical premium on banks’ core capital. If buffer requirements are reduced in times of crisis, the freed-up capital is immediately available for lending. Consequently, the CCyB is intended to counteract restrictions in lending that would otherwise worsen the crisis. In addition to its positive effect on banks’ loss-absorbing capacity, the CCyB can dampen excessive credit growth and thus prevent economic overheating.
The CCyB is enshrined in section 10d of the Banking Act and in the Solvency Ordinance (Solvabilitätsverordnung), transposing the European Capital Requirements Directive (CRD). The competent national authority – in Germany, this is BaFin – sets the buffer rate in the case of rising cyclical systemic risks. The Bundesbank prepares analyses of cyclical risks for this purpose. The CCyB can be set in steps of 0.25 percentage points, generally up to a maximum of 2.5%. However, a rate above 2.5% is possible if the supervisory authority considers this necessary. Banks in other countries within the European Economic Area must also apply the CCyB to the risk positions they hold in relation to Germany up to a rate of 2.5% – and vice-versa (mandatory reciprocity). For buffer rates above 2.5% reciprocity is recommended.
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In future, activating the SyRB will make it possible to address systemic risks, to the extent that these are not already covered by the capital buffers for systemically important institutions (G-SIIs/O-SIIs), the countercyclical capital buffer, or other measures under the European Capital Requirements Directive (CRD).
The SyRB is intended to address systemic risk, i.e. the risk of a disruption within the financial system with potentially serious adverse effects on the financial system and the real economy in a specific member state. The SyRB can apply to all risk positions or to a (sectoral) subgroup, e.g. residential or commercial real estate. The SyRB can be set for all banks or for banking subgroups. It can only be mandated for risk positions within a domestic market, within an EU member state or in a third country. In such cases, the buffer rate is at least 0.5% and is not subject to a cap.
The systemic risk buffer is enshrined in section 10e of the Banking Act. The interaction of the various capital buffers is governed by section 10h of the Banking Act. It must be complied with in addition to the G-SII and O-SII buffers.
The main purpose of the G-SII buffer is to make large, highly interconnected, complex banks with intentional reach more resilient by increasing their capital. G-SIIs are determined annually based on internationally defined criteria. The higher the degree of systemic importance, the higher the requirement for the additional capital buffer. Systemic importance is measured in relation to the global banking system. The G-SII buffer can range from 1% to 3.5%. The buffer must be satisfied at the consolidated level. The G-SII is governed by section 10f of the Banking Act.
The objective of the O-SII buffer is similar to that of the buffer for global systemically important banks. Its focus is on banks that play an important role in their country’s economy because of their size, interconnectedness and cross-border activities. BaFin and the Bundesbank jointly identify O-SIIs in Germany, taking into account relevant guidelines of the European Banking Authority (EBA). Systemic importance is measured in relation to the respective national banking system. The individually defined buffer can be specified on a consolidated or partially consolidated basis or at the individual institution level. In the case of a buffer level of 3% or more, approval from the European Commission must be obtained. The O-SII buffer is governed by section 10g of the Banking Act. As a general rule, credit institutions are required to meet only the highest of the two buffers – the G-SII buffer or the O-SII buffer.
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- Key features of the methodology for determining O-SIIs [PDF, 73KB] (in German)
- Additional details on O-SIIs (BaFin website)
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.
Measures to mitigate macroprudential or systemic risk
In exceptional cases, if the Financial Stability Committee has identified changes in the intensity of the macroprudential or systemic risk with the potential to have serious negative consequences for the domestic financial system and the real economy in Germany, BaFin can take further macroprudential measures in addition to the capital buffer requirements (section 48t of the Banking Act). These measures are subject to strict conditions and are only permitted on the Financial Stability Committee’s request. They include raising own funds requirements, disclosure requirements, liquidity requirements, large exposure requirements and risk weightings for certain exposure classes. Section 48t of the Banking Act also provides an option to increase the capital conservation buffer. At the European level, the procedure to be followed is specified in Article 458 of the CRR.
Macroprudential instruments to address systemic risks arising from the real estate market
BaFin can impose restrictions on credit institutions that grant loans for the construction or purchase of residential real estate located in Germany in order to counteract any disruption to the functioning of the financial system or a threat to financial stability in Germany. In particular, this may be necessary if residential real estate prices and new lending for the construction or purchase of residential real estate are rising sharply and lending standards are being significantly relaxed.
Lending can be restricted by:
- Capping the ratio of a borrower’s total debt in a residential real estate loan to the market value of the residential real estate when the loan is granted (loan-to-value ratio)
- Setting a final deadline for the repayment of a certain portion of a loan or, for bullet loans, setting a maximum maturity (amortisation requirement).
These instruments are governed by section 48u of the Banking Act. When specifying any such restrictions, BaFin can also specify, among other things, what proportion of a lender’s new residential real estate lending business is not subject to the specified restrictions (excess quota) and up to what loan amount one or more restrictions will not apply (de minimis limit).
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