COVID-19: BaFin complements economic relief measures through lowering countercyclical capital buffer
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As an associate in our Finance & Financial Regulation practice group I advise national and international clients on financial regulatory and finance matters, focusing in particular on the intersection of financial regulation and technology.
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Germany
As partner in our Finance & Financial Regulation Group in Frankfurt, I advise our national and international clients on banking regulatory issues and finance law.
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BaFin issued a general decree that lowers the required quota for the domestic countercyclical capital buffer to 0 per cent.
Following its quarterly assessment of the quota for anticyclical capital buffers, Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) reduced this quota to zero per cent. This reduction shall contribute to financial stability during the COVID-19 health and economic crisis. The anticyclical capital buffer serves explicitly for the purpose to be sapped during crises. Built in times of economic stability and growth, banks are allowed to use the capital stocked in this buffer to mitigate losses and continue granting loans to the real economy.
Capital requirements
Credit institutions and financial services institutions must meet certain capital requirements (e.g. following CRR (Regulation (EU) 575/2013) and section 10 paragraphs 3 and 4 and section 10c (capital sustainment buffer) of the German Banking Act (Kreditwesengesetz – KWG)).
Some additional core capital must be sustained for a organisation-specific anticyclical capital buffer following section 10d KWG. This specific anticyclical capital buffer comprises several geographic quotas mapping the organisations individual risk exposures.
The quota for the domestic anticyclical capital buffer can amount between zero and 2.5 per cent, and refers to the sum of total receivables according to the CRR (article 92, paragraph 3 CRR). BaFin sets the quota in steps of .25 per cent and reassess it on a quarterly basis.
The reduction of the anticyclical capital buffer does not affect in any way the minimum capital requirements set for the respective credit of financial services institution.
Previous quota of the anticyclical capital buffer
Just in July 2019 BaFin increased the quota from zero to 0.25 per cent. Such an increase in the domestic anticyclical capital buffer, however, does not take immediate effect, but is deferred to allow banks to build this buffer. Following the announcement in July 2019, the increase would have taken effect in July 2020. The now announced reduction is advantageous for banks that have started building the buffer in the past year. These banks can now use their capital buffer to gain some extra flexibility.
Outlook
BaFin announced furthermore that it does not expect to raise the quota for the anticyclical capital buffer before the end of the year 2020. BaFin justifies this step with its assessment of the impact of the COVID-19 crisis. Should this economic impact be less severe than expected and economic activity gains traction, BaFin could come to a different conclusion and set a higher quota following one of the quarterly assessments.
