Improving the EU Macroprudential Framework for the Banking Sector (Consultation response)

21 March 2022

Consultation response

In order to contain the financial stability risks posed by its banks, the EU should strengthen and further harmonize the application of its macroprudential framework by member states and develop dedicated tools to address climate-related systemic risks

Finance Watch responded to the European Commission´s targeted Consultation on Improving the EU Macroprudential Framework for the Banking Sector.

There is only limited evidence of the overall effectiveness of the current buffer framework since it was put in place in 2014, as this was a period of generally benign economic conditions, stopped short only by the Covid-19 pandemic. As of the beginning of 2020, only five of the European member states had appropriate countercyclical (CCyB) buffers in place. Thus, releasable buffer capacity to cushion the effects of the economic shock was very limited.

On present evidence, Finance Watch is of the view that the current macroprudential framework suffers, first and foremost, from the inconsistency of its application by the member states. This relates to the use of the CCyB and systemic risk buffers (SyRB) and can also be observed in member states’ approach to the designation of other systemically important institutions (O-SIIs) and the use of O-SII buffers.

Finance Watch cautions against using macroprudential instruments to compensate, usually ex-post, for the inadequate calibration of microprudential requirements. Financial stability considerations should not be sacrificed to achieve political objectives such as avoiding ‘unduly raising capital requirements’. Further, the current macroprudential framework lacks tools to address climate-related systemic risk, which has been recognised as one of the major risks to the financial system.

Finance Watch therefore recommends:

  • Clarification of the distinction between structural and cyclical buffers; the latter should be considered as a ‘first line of defense’ in any economic downturn.
  • Introduction of a mandatory CCyB, with a target rate in the range of 3-4% of RWA to be accrued over a 5-year period. The number corresponds broadly to the average level of management buffers held by Euro-area banks.
  • Alignment of the designation scheme for O-SIIs with the criteria for determining ‘significant institutions’ under the Single Supervisory Mechanism (SSM), in particular the total assets threshold of EUR 30 bn.
  • Empowering national supervisory authorities to impose mandatory restrictions on dividend distributions, share buy-backs and variable remuneration payments in crisis times.
  • Development of dedicated macroprudential tools to address climate-related systemic risks in the banking sector.
  • Faithful implementation of the Basel III reforms at the EU level, in particular, the risk weights for property-backed and corporate exposures; dilutive ‘transitional arrangements’ that could lead to permanent non-compliance with the agreed international framework should be avoided.