Although there are still no clouds on the horizon that would allow us to suspect any type of new economic or financial stormthe Bank of Spain has decided to anticipate and has announced that it will require financial entities to, starting in the fourth quarter of 2024, begin providing a new 1% capital buffer (about 7,500 million, in total), which will be activated gradually (in two phases) and which must be fully completed in the fourth quarter of 2026, two years later.

The ultimate objective is that this cushion accumulated in good times can be “released” in a crisis situation to allow financial institutions to do not turn off the credit tap to solvent families and companies despite the worst economic environment and thus avoid deepening recessions. Hence the name 'countercyclical capital buffer'.

“We are going to activate the capital buffer up to 1% gradually, to give entities the opportunity to complete it in a slow manner,” said the governor of the Bank of Spain, Pablo Hernandez de Cosin a meeting with the media.

Barely a month before De Cos' term as governor of the Bank of Spain expires (on June 12), he has separated the decision on the countercyclical cushion from this circumstance and from the possible attempt to leave a legacy of prudence after his management six years: “The Bank of Spain makes its decisions based on technical analysis. Already in 2019 we took a first step to prepare the market. Then, during the pandemic it was absurd to make that decision. We have waited for the pillars of The economy has been stronger. Coincidentally, this happens a few weeks before the governor's renewal, but it is a decision that has been in the making for a long time. There is no element of precipitation“, De Cos has settled.

Two phases

According to the most recent balance sheet data of financial entities, this additional point of capital is equivalent to about 7.5 billion euros. It has been established that in a first phase, a cushion of 0.5 capital points will be activated (3.75 billion) starting in the fourth quarter of 2024, which will be payable in the fourth quarter of 2025.

In a second phase, a year later the process would be repeated to raise it by another 0.5 points starting in the fourth quarter of 2025, which would be payable in the fourth quarter of 2026.

Macroprudential tool

As defined by the Bank of Spain, the countercyclical capital buffer is a macroprudential instrument designed to reinforce the solvency of the banking system through capital accumulation in phases of economic prosperity —which is when the generation of systemic risks usually occurs—, in order to be used later when risks materialize that may affect financial stability.

It is a tool that has existed in the Basel regulatory framework since 2016, and that had not been activated until now in Spain, but had been activated in 13 other European countries (including Germany, France, Holland, Belgium, Ireland, Cyprus, Luxembourg, Lithuania, Slovakia, Hungary), among which are not, for example, neither Portugal nor Italy.

Two decisions

In reality, what the Bank of Spain has decided now is “start the procedure of reviewing the framework for setting the countercyclical capital buffer and establishing its corresponding percentage starting in the fourth quarter of 2024,” as explained by the governor. From now on, the public consultation period and financial entities – which had already expressed their rejection of a possible measure of this type – will be able to send their observations to the Bank of Spain's proposal.

Strictly speaking, the Bank of Spain has taken two decisions.

The first of them is structural in nature. It consists of the fact that, from now on, the decision to activate (or not) the countercyclical capital buffer can be adopted, not only when leading indicators anticipate a crisis (for example, a real estate bubble), but also at times such as the current situation, in which, according to the Bank of Spain, the risks are balanced and are “at a standard level (intermediate between a high level and a low level)”.

The second decision is conjunctural. It consists of activating the buffer, setting it at 1%, and applying it gradually over two years, until the end of 2026.

“No” impact on economic growth

From the point of view of financial institutions, a measure such as the activation of the countercyclical capital buffer can have an automatic translation in the form of lower capacity of entities to provide credit at the current time (in exchange for being able to continue giving it in times of future difficulties).

However, as explained by the governor of the Bank of Spain himself, the current cocktail of indicators macroeconomic (GDP and employment), financial (credit and real estate), the market and the banking system (profitability, doubtful loans, interest margin) that has led to the decision to apply the countercyclical buffer at this time allows us to think that the measure will put have a “zero” impact on economic growth. “The effect may be null given the evolution of economic growth and the profitability of the entities, now higher,” she explained.

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