AFME calls for review of capital buffer framework after COVID-19 crisis
19 October 2021 UK
Image: agcreativelab/stock.adobe.com
The Association for Financial Markets in Europe (AFME) has published a paper investigating the impact of the pandemic on the use of the buffer framework and recommends improvements to its viability.
The Capital buffer framework was mandated under the Basel III regulatory reforms after the financial crisis of 2007-8. It 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.
An AFME report reveals that despite encouragement from central banks, very few banks dipped into their buffers, 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 has recommended 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 says: “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.”
Usherwood adds: “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 Financial Stability Board and Basel Committee on Banking Supervision have both recognised the need to make buffers more releasable in their assessments of the policy measures taken during the pandemic.
The European Commission has also mandated the European Banking Authority to review the macroprudential framework in advance of a legislative review in 2022, which will consider the overall design of the buffer framework.
The Capital buffer framework was mandated under the Basel III regulatory reforms after the financial crisis of 2007-8. It 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.
An AFME report reveals that despite encouragement from central banks, very few banks dipped into their buffers, 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 has recommended 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 says: “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.”
Usherwood adds: “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 Financial Stability Board and Basel Committee on Banking Supervision have both recognised the need to make buffers more releasable in their assessments of the policy measures taken during the pandemic.
The European Commission has also mandated the European Banking Authority to review the macroprudential framework in advance of a legislative review in 2022, which will consider the overall design of the buffer framework.
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