The Financial Supervisory Authority decided on 15 May to increase the countercyclical capital buffer in accordance with recommendations from the Financial Stability Council dated 13 April 2018.
The primary purpose of the countercyclical capital buffer is to increase the resilience of the financial system against potential losses due to increased cyclical systemic risk. During a financial downturn, releasing the buffer provides financial undertakings with the margin to maintain a sustainable supply of credit. The countercyclical capital buffer should therefore change in reflection of developments in cyclical systemic risk.
The continuous growth in household and corporate debt for the past year indicates increased cyclical systemic risk. At the same time, housing prices have deviated from fundamentals, which further indicates increased cyclical systemic risk. In addition, risk has increased in confined sectors where no targeted policy responses are available at present. The Council’s recommendations specifically point to the sharp uptick in the bank funding cycle and the interaction between commercial property lending, real estate development projects and high commercial property prices. The council also notes that, at least for the present, supervisory bodies are facing difficulties in assessing the need for applying targeted policy instruments in the housing market and the impact of their application. If using specific measures in response to the abovementioned risk factors becomes an option in subsequent quarters, the Authority will review whether they are called for and what impact their application will have on the value of the countercyclical capital buffer. Such a review may be conducted before the entry into force of the decision to raise the countercyclical capital buffer.
The Authority’s decision entails raising the countercyclical capital buffer from 1.25% to 1.75% for domestic exposures of all financial institutions, both individually and on a consolidated basis, unless they are specifically excluded from the buffer according to Article 86(d)(4) of the Act on Financial Undertakings. The calculation of the own funds requirements shall reflect the weighted average of the countercyclical capital buffer rates that apply domestically and in other EEA-States, in accordance with each country’s share of the credit exposure, pursuant to Article 86(d)(3) of the same Act.
Further information on the capital buffer is available here.