Usability Of Bank Capital Buffers The Role Of Market Expectations PDF Download

Capital buffers are key macroprudential policy instruments. Regulatory capital buffers ("the buffers") were introduced after the global financial crisis to mitigate systemic risk. Buffers help to ensure the resilience of banks and to conserve their capital by placing constraints on distributions if buffers are breached. Unlike minimum requirements, buffers can be drawn down when losses have to be absorbed during times of stress and are replenished thereafter. Using buffers may thus cushion the financial cycle, especially in the case of the countercyclical capital buffer (CCyB), which is designed to be released by the authorities in a downturn. Banks might not always be able or willing to use their buffers. For the purpose of this report, the "usability" of buffers and excess capital means that banks are able to deplete their buffers without triggering a breach any parallel minimum requirements. The minimum requirements include the leverage ratio (LR), the minimum requirement for own funds and eligible liabilities (MREL) or the risk-weighted capital framework for the upcoming leverage ratio buffer for global systemically important institutions (G-SIIs), also referred to as the G-SII buffer. Even if buffers are usable from this perspective, banks might be unwilling to use them. Banks' willingness to use buffers is beyond the scope of this report and may also depend on factors other than buffer usability.1 However, investigations into banks' willingness to use buffers need to take into account potential regulatory impediments that might be an important reason why banks do not use buffers. Thus, both the ability and the willingness to use buffers may limit the capacity for buffers to cushion shocks. When buffers overlap with parallel minimum requirements, buffer usability is inevitably constrained. EU banking regulation ("the banking package") establishes three parallel frameworks, each with minimum capital requirements: the risk-weighted capital requirements framework aimed at increasing the resilience of banks; the supplementary leverage ratio requirements constraining the build-up of leverage, mitigating the risk of destabilising deleveraging processes and safeguarding against model risk and measurement error; and the framework to facilitate the resolution of failed banks without putting public funds at risk. These three frameworks apply simultaneously, with each of them playing an important role in contributing to the resilience of the banking system. However, the banking package also allows multiple uses of capital across these three frameworks, which in some instances includes the buffers.