Global: ECB Advocates for Increased Bank Capital Buffers Amid Economic Uncertainty

Amidst a significant slowdown in lending across the euro zone due to high interest rates, the European Central Bank (ECB) has advised against reducing bank capital buffers. Instead, it suggests that some countries should consider increasing them, given the record profits in the banking sector and looming economic uncertainties.

Over the past year, lending has nearly come to a halt in the euro zone as the ECB’s elevated interest rates have deterred both borrowers and lenders. This slowdown has also contributed to deflating housing bubbles in wealthier nations such as Germany.

Despite this, the ECB emphasized the importance of maintaining capital buffers that help banks absorb potential losses, noting that property values remain high and debt levels are significant in some countries.

“The Governing Council supports national authorities planning to increase capital buffer requirements,” the ECB stated.

The ECB pointed out that banks have achieved record profits, primarily due to the high interest rates they earn on deposits held at the ECB, and have substantial room above their current capital requirements.

“A further build-up of releasable capital buffer requirements to address vulnerabilities and enhance macroprudential space remains desirable in some countries, as prevailing banking sector conditions limit the risks of procyclicality,” the ECB added.

Currently, the Netherlands holds the highest countercyclical capital buffer, which is designed to protect banks from losses during economic downturns, at 2% of their assets. Germany and France have set theirs at 0.75% and 1%, respectively.

Additionally, the ECB supports maintaining existing restrictions on mortgage lending, which include measures such as limits on the amount customers can borrow relative to their income or the value of the property.