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I will start of course by noting that the European banking sector entered this COVID-19 crisis in a much stronger position than in the past and in the previous crisis in particular. The capital position was much stronger – is much stronger: 14.8% common equity tier one (CET1) ratio to start with – compared, for instance, with below 9% CET1 ratio in 2008. So, much lower in level and much lower, of course, also in quality of capital. Also, liquidity buffers are much stronger. We have €3.2 trillion of high quality liquidity assets/liquidity buffers available for the banks, and a liquidity coverage ratio of 145% – 100% is the minimum level, as you know.
So, significant buffers, and there has been very swift action by the ECB: a swift policy response on the supervisory side to increase the headroom and the possibility for banks to use these capital buffers and liquidity buffers to support their customers, and also for the capital buffers to absorb losses.
I will not go into great detail on the policy measures: you probably know them. But in general we created – through dividend payment restrictions, availability for use of Pillar 2 buffers and other measures, such as frontloading legislative decisions on the quality of capital, – a space of approximately €160 billion, thus additional capital that can be used by the banks in this crisis. First of all let me note that we always focus on the parts of the banking union that are not yet there, on the incomplete nature of the banking union. I myself am always quite vocal in asking for a completion of the banking union.
From time to time, we should also stop and consider; how much is there in the banking union which is actually working? Such a fast and unified supervisory response at the European level would not have been thinkable in 2008/2009. All in all, let's say – let me give the overall envelope, the figures which I think are relevant: banks now have €400 billion of capital available as a buffer that can be freely used on top of the capital conservation buffer, which is where the constraints to [dividend] distribution, as well as payments of Additional Tier 1 coupons and variable remunerations, are key. €400 billion, to give you an order of magnitude, is an amount which is comparable and would have been sufficient to withstand an increase in non-performing loans similar to the one observed in the sovereign debt crisis. So it's a quite significant amount of money.
If you add the capital conservation buffer, which is the additional buffer on top of minimum requirements, we reach a total buffer of €610 billion of capital resources that can be used. So it's quite a significant amount, and, differently from 2009, when banks were at the origin of the shock and their malfunctioning was actually transmitting into the real economy, so far the banks have been acting more as a shock absorber. So they were not at the origin of the crisis, but they were actually helping out, absorbing the shock. They have been able to accommodate the significant increase in lending in March; approximately €120 billion, which is one of the highest increases on record. This was driven mainly by drawing on committed credit lines, but also some re-intermediation of activities developed outside the regulated banking sector; for instance by money market funds and the like. They've also withstood a significant spike in market risk due to the increased volatility in markets.
If you look at the evidence provided by the ECB in the bank lending survey, the banks have been able to do so without a significant tightening of lending standards – very differently from what happened in 2008, when there was a significant restriction in lending standards. Banks also expect that in the second quarter of this year – so now, basically – there will be a further relief in lending standards which will accommodate an increase in the demand for credit. Of course now the government guarantees and the moratoriums are having an impact on the banks' balance sheets. We will have information later on, around the summer; let's say around July. All in all, if you take a snapshot right now, the banks have behaved as expected and in line with the increased resilience created by supervisory pressure and regulatory reforms after the last crisis.
Now, let me say me a little more about the area of uncertainty in which we are right now. The first point that I would highlight is that there is still some apparent reluctance from the bank side to actually use the capital and liquidity buffers. The liquidity buffers have actually increased so far. There seems to be a little bit of uneasiness in actually using also the Pillar 2 buffers. If you browse through the first-quarter results that have been published by the banks, only less than a handful are projecting a very limited use of the Pillar 2 buffers at the end of the year. We have asked banks why this is the case. They argue that they are concerned about the reaction of markets, of rating agencies, of investors. We will also discuss this with the rating agencies; there seems to be a slight mentality that nobody wants to be the first dipping into the buffers. This could be a bit of an issue in terms of making these amounts of capital fully available to absorb losses and especially to support the economy.
The triggers to suspend payments on Additional Tier 1 instruments are very much a concern. So that's a point on which we must reflect; whether the current regulatory framework is working as expected. Also there is a point which the banks are raising to us quite a lot, which is: you – the ECB – are now making these buffers available. But if you switch them on again in the future, we could be in trouble. So they are reluctant to use them. We always send signals that we will not switch the buffers back on again very quickly. We will give ample time to the banks to rebuild the buffers, and we hope to be able to give more communication about that in the near future. In general I'd say we would prefer to give a sort of bank-by-bank guidance, allowing them to rebuild buffers in a comfortable way.
This issue of the buffers and the impact on lending is a question that we are struggling with. A second issue of course is profitability, which was already low to start with – and it has become even lower. The return on equity was 5.9% at the end of 2019, and according to analysts' expectations, it will more than halve to 2.4% towards the end of the year. The valuations, the price-to-book ratios, are very depressed. Some argue that this is our fault because of the constraints to dividend distributions. But I would argue that there was a weakness in terms of valuations which had been there for a while. Although we acknowledge that the dividend constraints might have an impact on investors' perception, we think that they are warranted in the current market conditions.
On the cost of risk issue, browse the results of the first quarter. You will see that the figures in terms of cost of risk and provisioning behaviour reflect the great uncertainty that was already there at the start of this crisis. Banks use very different scenarios and very different expectations to project their loss expectations and to determine their provisioning needs, and there is a wide variety across banks. Now, the ECB published a few days ago the macroeconomic projections, which now already incorporate the COVID-19 shock. We would expect this scenario to provide an anchor for banks' expectations in the second quarter. This should lead to more consistent, and ideally also slightly more prudent, provisioning choices in the second quarter of the year.
In general, if you look at the cost of risk, for instance, we noticed that 40% of the banks registered an increase in cost of risk in the first quarter of 2020 compared to the first quarter of 2019 below two basis points, so very minimal. Only 9% projected an increase higher than 20 basis points, so we expect to see more in the next quarter.
Let me move towards the conclusion. This is the situation we are in now, uncertainty, but we expect banks to start improving their projections of their expected losses in the future and the impact on the asset quality – particularly from this crisis. We are currently running a vulnerability assessment, so we are ourselves trying to estimate how the banks would fare under the scenario provided by the ECB in the macroeconomic projections. But also under an adverse scenario, and a pretty severe one which has also been communicated by the ECB last week. We will try to use these scenarios, of course, to challenge the conservatism of the banks in their provisioning choices. We will also look at the adverse scenario to check whether the banks would also be able to withstand a situation in which you have a second wave of contagion after the summer, and a much slower path of recovery after this shock.
This is more or less where we are right now in terms of looking at the banks. Maybe an additional point on which I would make a final remark is that we have a flurry of national measures which have been put in place by national authorities, governments in terms of moratoriums, and government guarantees. We very much welcome these measures. We think that, together with our supervisory relief and with the extraordinary support provided by our colleagues on the central banking side of the ECB, this is a very effective package to address the issues raised by the crisis. At the same time, we noticed that these national measures are very diverse. They range from 2% of GDP in terms of coverage to 40% of GDP across countries in our jurisdiction in the banking union.
I would stress that the support for banks is actually European in nature; it is what is coming from the ECB central banking side in terms of funding and collateral policy. The support in the form of supervisory relief measures is also European in nature. It's our relief package, but the differences between the national support packages will imply that the asset quality programme will materialise in a different way across Member States, potentially reinforcing the segmentation of the markets in the banking union. So I am very supportive, of course, of the recent recovery plan put forward by the European Commission, and the idea that there could be European measures that can make the response to the crisis more integrated and avoid further segmentation in our banking markets. I would leave it there and I am now ready for questions and the discussion.
Q &A at SSM