18 March 2022

WSBI-ESBG: European Commission review of EU macroprudential framework for banks

 On March 18, ESBG issued a new position paper with recommendations to the European Commission on the review of the EU's macroprudential framework for the banking sector.

The paper stressed out that the current capital buffer framework has scope for improvement as it focuses too much on capital levels and financial resiliency. In our view, the capital buffer framework suffers from a lack of transparency, double counting of risks in several buffers, and inconsistent application across Member States.

With the finalisation of the Basel III, the overall loss absorbing capacity of the European banking sector is already sufficient to guarantee financial stability, and additional increases are not warranted. Nevertheless, some adjustments to the macroprudential framework should be explored with the aim of  improving buffers' usability, while  maintaining and improving the credit provision capacity.

A key point is that double counting of risks should be avoided. It would be important to ensure that the same risks are not covered via different and overlapping measures. Furthermore, any steps towards harmonisation across the EU/EEA should also leave  enough room for national specificities.

Regarding the buffers, we strongly oppose to the application of a positive neutral rate to the Countercyclical Capital Buffer (CCyB) in the current setting. If we want to increase the flexibility and responsiveness of the framework to exogenous shocks, it would be better to make the Capital Conservation Buffer (CCoB) releasable. Those countries that are already applying a positive neutral rate for the CCyB should be compensated with the reduction of structural requirements; e.g. the Systemic Risk Buffer (SyRB)  or the CCoB.

There is also a case for the SyRB to be removed or at least limited. It gives too much discretion to authorities to address  undetermined risks and it is not mentioned in the Basel agreement. Furthermore, Pillar 2 should not be used to address a systemic risk.

Double counting of Article 458 CRR and the output floor should be removed. The output floor is a backstop requirement that limits the use of internal models, while the Article 458 addresses systemic risks. The measures embedded in Article 124 and Article 164 CRR should be removed for the same reason.

Finally, improvements to the design and application of the buffers, on the scope of the framework (e.g. extension to fintech/bigtech), and in terms of better guidance and communication could be further envisaged.

ESBG

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