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Capital buffers are intended to be used in a crisis as shock absorbers, but certain factors can prevent banks from drawing them down. The issue of buffer usability has been extensively discussed and is being continuously monitored during the coronavirus crisis. What does this imply for future policy?
Banks’ willingness to use capital buffers during the coronavirus crisis should help limit the decrease in lending and lead to better economic outcomes. It should increase lending, with positive effects on GDP and lower credit losses, but without a negative impact on banks’ resilience.
The capital relief measures introduced in the euro area since the outbreak of the coronavirus crisis have so far not been fully reflected in the target CET1 ratios banks have announced. Market pressure from credit and equity investors can be a key explanatory factor for this.
It would have been easier to release capital in response to the coronavirus crisis if authorities had built up larger countercyclical capital buffers before the pandemic. This could have shielded economic activity better and complemented monetary policy more effectively.