Macroprudential measures

Macroprudential measures are intended to make the financial system as a whole more resilient to crises as a way of protecting the real economy more effectively. The capital buffer requirements are the most important of the potential measures.

Capital buffers

The capital buffers, which were introduced for the first time under Basel III, are aimed at enhancing banks' loss-absorbing capacity. The idea is for banks to build up capital buffers in good times which they can then use to maintain their provision of credit in times of crises. A capital buffer therefore has a countercyclical effect.

Unlike the prudential measures that can potentially be taken if an institution falls short of the minimum own funds requirements, a failure to meet the buffer requirements does not lead to the loss of an institution's banking licence, but merely to restrictions on the distribution of dividends, bonuses, etc.

Based on the recommendations of the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS) developed four capital buffers:

  1. Capital conservation buffer
  2. Countercyclical capital buffer
  3. Buffer for global systemically important institutions
  4. Buffer for domestic systemically important institutions

Furthermore, the European Union (EU) introduced an additional capital buffer for European banks in the form of the systemic risk buffer. Together, these five buffers were enshrined in the German Banking Act (Kreditwesengesetz KWG) in the context of the implementation of the Capital Requirements Directive (CRD IV). The buffer requirements must be met using Common Equity Tier 1 capital (CET 1) only.

Capital conservation buffer (section 10c of the Banking Act)

The capital conservation buffer (CCB) is intended to improve banks' general loss-absorbing capacity. It is being phased in gradually, starting from 1 January 2016 (see figure 1). The target level is 2.5% of an institution's risk-weighted assets (pursuant to article 92 (3) of the CRR).

Countercyclical capital buffer (section 10d of the Banking Act)

The countercyclical capital buffer (CCyB) is primarily intended to counteract lending constraints in the event of a crisis. At the first signs of excessive credit growth in the country's economy, the national competent authority (in Germany, this is the Federal Financial Supervisory Authority – BaFin) sets the buffer at a rate of up to 2.5%. The CCyB thus acts to dampen excessive credit growth and prevents the economy from overheating. Based on the regional distribution of their lending, the institutions then calculate their institution-specific buffer rate as the weighted average of the rates applicable domestically and abroad. Should signs of a crisis emerge, the competent authority can lower the rate directly so that - ideally - banks would not have to cut back their lending. The European Systemic Risk Board (ESRB) keeps a list of the CCyB rates for the individual European countries. The Basel Committee keeps a similar list at the global level, which also includes the relevant third countries.

Capital buffer for global systemically important institutions (G-SIIs) (section 10f of the Banking Act)

The primary aim of the G-SII buffer is to make strongly interconnected and internationally active banks more resilient by requiring them to hold additional capital in reserve (see figure 2). It is also designed to facilitate the orderly resolution of distressed banks. Institutions deemed to be G-SIIs are identified each year on the basis of internationally standardised criteria. The latest list of designated banks can be found on the FSB 's website. The higher the degree of systemic importance, the higher the additional capital buffer requirement, which ranges between 1% and 3.5%. The buffer is being phased in gradually, starting from 1 January 2016 (see figure 1), and must be met at the consolidated level.

Capital buffer for other systemically important institutions (O-SIIs) (section 10g of the Banking Act)

The aim of the capital buffer for O-SIIs is similar to that for G-SIIs. However, the focus here is on banks that are important to the functioning of their home country's economy. The Basel Committee intentionally allows national authorities to exercise discretion in the methodology they use for identifying O-SIIs. The Deutsche Bundesbank and BaFin are jointly responsible for identifying German O-SIIs, taking note of the relevant guidelines and recommendations published by the European Banking Authority (EBA). BaFin keeps an up-to-date list of institutions currently designated as O-SIIs on it`s website. The institution-specific buffer of up to 2% is to be complied with in stages starting from 1 January 2017 (see figure 1) and can be imposed at the consolidated, sub-consolidated or individual bank level.

Systemic risk capital buffer (section 10e of the Banking Act)

The systemic risk buffer (SyRB) is imposed not on individual institutions but on certain groups of institutions or even all groups of institutions in order to mitigate systemic or macroprudential risk. As a general rule, the buffer can only be imposed for domestic exposures, exposures in an EU Member State or exposures in a third country. The buffer rate is not capped, but the minimum level is 1%. An authority must notify the European Commission, the EBA, the ESRB and, if necessary, the competent authorities of any Member States affected in advance of its intention to impose the buffer, and is only permitted to do so if the Capital Requirements Regulation (CRR) or the Banking Act do not specify any other instrument for the identified case. Generally, credit institutions must only comply with the highest of the three last-mentioned buffers (G-SII buffer, O-SII buffer and SyRB). Interaction between the capital buffers is governed by Section 10h of the Banking Act.

Minimum capital ratios and capital buffers

Systemic risk buffer and/or capital buffers for systemically important institutions (G-SIIs/O-SIIs) *

SyRB as set nationally (min. 1%)
G-SII buffer 1% to 3.5% **
O-SII buffer as set nationally (max. 2%)

Countercyclical capital buffer

0 % bis 2,5 % **

Capital conservation buffer

2,5 %

Tier 2 capital

2 %

Additional Tier 1 capital

1,5 %

Common Equity Tier 1 capital

4,5 %

* Generally, only the highest of the three buffers is to be applied.
** May also be higher.

Further macroprudential instruments harmonised at the European level (Section 48t of the Banking Act)

There are other macroprudential measures besides the capital buffer requirements. These include additional own funds requirements, enhanced disclosure and liquidity requirements, as well as higher risk weightings for certain exposure classes. Article 458 of the CRR permits EU Member States to impose such measures as soon as systemic risk or risks to the real economy are identified.

National macroprudential instruments to address systemic risk originating in the real estate market (Section 48u of the Banking Act)

BaFin can impose restrictions on credit institutions to curtail the granting of loans for the construction or purchase of domestic residential real estate, if and to the extent that such restrictions are deemed necessary to counteract any disruption to the functioning of the domestic financial system or threat to financial stability in Germany. This can be necessary in particular in cases where prices of residential real estate and the granting of new loans for the construction or purchase of residential real estate rise sharply and change significantly when a loan is granted.

The granting of loans can be restricted by:

  • capping the quotient of a borrower’s total debt in a real estate loan and the market value of the residential real estate when the loan is granted;
  • setting a final deadline for the repayment of a certain fraction of a loan or, for bullet loans, setting a maximum maturity.

In imposing the above-mentioned restrictions, BaFin can also determine, amongst other things, the percentage of new business for residential real estate financing by a credit institution which is not subject to the restrictions imposed (free quota) and the loan amount up to which one or more of the restrictions do not apply (de minimis threshold).