In an effort to ease lending during the COVID-19 outbreak, bank supervisors across Europe have either cut or frozen countercyclical buffers alongside a slew of other measures aimed at releasing more bank capital.
The buffers are meant to protect banks from procyclicality, which may disrupt the credit supply and amplify the impact of an economic downswing on the financial system. The blow the outbreak has dealt to the real economy so far is severe enough that supervisors deem it necessary that banks use all the "rainy-day" reserves they had set aside for times of crisis.
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In a March 20 statement, the Basel Committee on Banking Supervision called on banks to use their countercyclical buffers and other capital and liquidity reserves, including their stock of high-quality liquid assets, to back the economy and absorb losses. For the time being, such actions should be prioritized over discretionary distributions such as dividends, the committee advised.
Authorities in almost all European countries that have introduced countercyclical buffers either cut the buffers to zero or put planned increases on hold in the two weeks from March 9 to March 20. Among the latest announcements were those from France and Germany March 18 with supervisors in both countries reducing the buffers to zero from 0.25%, effective April 1; and from Bulgaria where the central bank kept the buffer at 0.5% March 19, suspending two planned increases.
The cuts will release €8 billion of bank capital in France, Reuters said March 18, citing Finance Minister Bruno Le Maire, and €5 billion of capital in Germany, according to Bloomberg. The scrapped buffer hikes in Bulgaria will save local banks 700 million leva, or about €360 million.
In Sweden, which has already cut its buffer to zero from 2.5%, this will release some 45 billion Swedish kronor, or around €4.1 billion, in capital.
"The buffer is being lowered pre-emptively to ensure a well-functioning supply of credit," Sweden's financial supervisory authority Finansinspektionen said in a March 13 statement.
Belgium, Denmark, Iceland, Ireland, Lithuania, and the U.K. all announced or already enacted cuts to countercyclical buffers to zero earlier in March. Most cuts not yet in force will take effect from April 1.
The central banks in the Czech Republic and Slovakia have kept buffers at 1.75% and 1.5%, respectively, but put previously planned hikes on hold. The buffer in Luxembourg remains at 0.25% after the decision to raise it from zero in late 2019.
Norway has decided to lower the buffer to 1% from 2.5%, which will increase the banks' lending capacity by between 500 billion and 600 billion kroner, or between some €42 billion and €50 billion. Net customer loans in Norway increased to €399.06 billion in 2019 from €365.91 billion a year earlier.
