German Financial Stability Committee: In light of the pandem-ic, countercyclical capital buffer of 0% until end-2021 appro-priate

One of the topics addressed by the German Financial Stability Committee (G-FSC) at its meeting today was the impact of the coronavirus pandemic on the German financial system. Sweeping monetary policy, fiscal policy and supervisory measures have so far contained the economic fallout from the pandemic and averted disruption to the functioning of the German financial system. It is not possible to rule out adverse developments in the coming quarters that could give rise to losses in the financial system. In the G-FSC’s view, this highlights the vital function of buffers in the financial system, which can be used during periods of stress to maintain the supply of credit.

In this context, the G-FSC also discussed the countercyclical capital buffer and the level at which it should be set. Owing to the pandemic, BaFin lowered the buffer from 0.25% to 0% as of April 2020, where it has remained ever since. Given the need for credit in the real economy and the potential for credit losses in the further course of the coronavirus pandemic, BaFin does not intend to raise the countercyclical capital buffer before the end of 2021. The G-FSC considers this appropriate. The measure gives the German banking sector planning certainty and makes it easier for banks to absorb credit losses and maintain a sufficient supply of credit to enterprises and households. Once the coronavirus pandemic has been overcome, the state of affairs in terms of cyclical vulnerabilities and risks will determine whether the buffer is then raised.
The G-FSC supports the recommendations made by the competent supervisory authorities to the financial sector to either suspend or heavily cut dividend payments and share buybacks. Taking such action helps to safeguard the resilience of the financial system in the face of the current high level of economic uncertainty. 

There will also be a review of the national methodology used for the countercyclical capital buffer this year, which will involve the pooling of experience acquired in recent years at the national, European and global level. Amongst other things, the G-FSC will examine whether the buffer can be deployed more flexibly and weigh up whether larger buffers should be built up in periods of economic prosperity so that these can be released in times of crisis. It considers an internationally coordinated approach important here.