Industry calls for review and rebalancing of capital buffer framework to make it more usable in a crisis | AFME


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Industry calls for review and rebalancing of capital buffer framework to make it more usable in a crisis
19 Oct 2021
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The Association for Financial Markets in Europe (AFME) has today published a paper investigating the impact of the pandemic on the use of the buffer framework and recommending improvements to its viability.

 

During the Covid-19 pandemic, central banks allowed banks to draw on their capital buffers to ensure lending to the economy continued and to avoid a crisis. This is the first time that the use of capital buffers has been called into action since the framework was established as part of the reforms post the financial crisis.

 

AFME’s paper shows that despite central banks encouraging banks to use their buffers, very few actually dipped into them for a number of reasons, primarily because of the stigma associated with triggering the Maximum Distributable Amount (MDA) - the capital level that a financial institution must meet in order to be able to make distributions such as dividend and remuneration pay-outs. 

 

In light of this, the report recommends: a rebalancing of the Capital Conservation buffer and Countercyclical Capital buffer; better coordinated supervisory communication; and a more transparent, rules-based MDA framework.

 

Constance Usherwood, Director of Prudential Regulation, at AFME said:  “As we emerge from the pandemic it is important so see what lessons can be drawn from the way in which regulators expected banks to make use of the capital buffer framework and how effective this was. While the industry welcomes the supervisory measures which were taken, supporting banks to continue lending, there is evidence to suggest that in practice, banks did not want to draw on their buffers due to negative interactions with other parts of the macroprudential framework, such as MDA triggers.

 

“We think the usability of buffers could be improved by reducing stigma from breaching MDA triggers through a rebalancing between the  Capital Conservation buffer and the Countercyclical Capital buffer. In addition, there is room for improved and coordinated supervisory communication and a more transparent, rules-based MDA framework.”

 

The need to make buffers more releasable has been recognised by both the FSB and the BCBS in their assessments of the policy measures taken during the pandemic. In the FSB’s interim report to the , which is soon to be followed up with a final report, they suggest “it may be beneficial to consider whether there is sufficient releasable capital in place to address future systemic shocks”. The European Commission has also recently mandated the EBA to review the macro-prudential framework in advance of a legislative review in 2022, which will consider the overall design of the buffer framework.

 

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Rebecca Hansford

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