German Financial Stability Committee recommends activating countercyclical capital buffer and releases sixth annual report

In its meeting on 27 May 2019, the German Financial Stability Committee (G-FSC) decided to submit a recommendation to the German Federal Financial Supervisory Authority (BaFin). It is recommending to BaFin that the domestic countercyclical capital buffer (CCyB) be activated as from the third quarter of 2019 and lifted to 0.25%. The countercyclical capital buffer applies to banks, which are required to satisfy the new requirement within 12 months of its activation. The countercyclical capital buffer is a preventive tool designed to make the financial system more resilient to cyclical systemic risks. This measure will support sustainable lending to the real economy, in particular in periods of stress.

Readying the financial system and real economy for cyclical systemic risks

The G-FSC has a mandate to identify potential risks to financial stability in Germany at an early stage and issue a timely warning or recommend countermeasures. In the opinion of the G-FSC, cyclical systemic risks have built up in the German financial system during the long spell of economic expansion and low interest rates. These cyclical risks are as follows: (i) potentially underestimated credit risk; (ii) potentially overvalued loan collateral on the back of many years of rising real estate prices; and (iii) interest rate risk in the form of capital market interest rates staying low for an even longer period or of risk premiums increasing unexpectedly abruptly or strongly.

Countercyclical capital buffer a preventive tool designed to bolster financial system resilience

The German economy is experiencing the longest period of expansion since the country’s reunification. It remains on a growth path, even if it has experienced weaker spells. However, if the aforementioned systemic risks materialise, the banking system could respond by excessively curbing the supply of credit to the real economy. The countercyclical capital buffer is used to build up a buffer in the banking system when the economy is in good shape, so that it is available as an additional reserve to cover losses. If the cyclical systemic risks ease off, the buffer can be reduced again. Particularly in periods of stress, it can be immediately lowered in order to absorb losses. That way, the sustainable supply of credit to the real economy can continue to be supported in periods of stress, thus reducing the likelihood that lending will be curbed excessively.

To enable the countercyclical capital buffer to have its intended preventive impact, it needs to be activated in the current favourable economic situation. The German banking sector ought to be able to meet the additional capital requirements associated with activating the CCyB primarily by drawing on existing excess equity. The recommendation makes allowances for uncertainty surrounding the future path of general economic conditions. BaFin reviews the calibration of the countercyclical capital buffer at quarterly intervals and adjusts it as appropriate. That also applies during the 12-month phase-in period.

The German Financial Stability Committee also used its meeting on Monday to adopt its sixth annual report to the German Bundestag. This report offers a detailed account of the financial stability topics addressed by the committee during the April 2018-March 2019 reporting period.

German Financial Stability Committee (G-FSC) the central committee for macroprudential surveillance in Germany

The German Financial Stability Committee is the central body for macroprudential oversight of the financial system in Germany. It strengthens cooperation among the institutions tasked with safeguarding financial stability. Its members are representatives of the German Federal Ministry of Finance, the Deutsche Bundesbank and the German Federal Financial Supervisory Authority (BaFin). The committee first convened on 18 March 2013.