Bank of Spain raises countercyclical capital buffer to 1% and will require banks to pay $7.5 billion to face future crises

The Bank of Spain has begun the process of activating the countercyclical capital buffer (CCA) required of national enterprises for their exposures located in Spain. For the first time in ten years of existence, the supervisory authority is activating this tool, and it does so by increasing from the current 0% to 1% the additional reserves it requires groups to release in times of crisis and cover losses or help stabilize the economic situation. In terms of volumes, the Bank of Spain estimates that this requirement will amount to 7,500 million euros from the balance sheets of enterprises.

“We are going to move to a design where, compared to the previous situation where we activated the counter-cyclical capital buffer only when we determined that systemic risks are high, it will now be activated when risks are intermediate (standard, not very high) . neither high nor very low), which represents the anticipation of the activation process,” explained the head of the institution, Pablo Hernández de Cos. Therefore, if the Bank of Spain determines that we are at an intermediate level of risk, it will want the optimal buffer level to be 1%.

In general, the regulator believes that we are already at the level of intermediate risks. “The level of risk that we see today is an intermediate level of risk, and therefore we are going to begin the process of accumulating capital to 1%. We will do this gradually because it is important to give subjects enough time to increase slowly. their capital buffers up to the required requirements,” De Kos explained.

Implementation will be gradual. The buffer percentage is expected to be set at 0.5% as of the fourth quarter of 2024, to be applied from October 1, 2025. Going forward, as long as cyclical systemic risks are maintained at standard levels, the Bank of Spain is expected to increase the percentage of the corresponding buffer to 1%, starting in the fourth quarter of 2025, which will apply from 1 October 2026.

“This is a decision that we are making today based on the information that we have today. We are going to continue to monitor the situation, and if any circumstances arise in one direction or another, we might change the structure,” de Cos warned.

That is, this second increase in the buffer will require a new decision, separate from the one currently submitted to the public information process, and will be subject to a new process of its kind on the appropriate dates. “In any case, the Bank of Spain may reconsider or even cancel this plan if it receives relevant information that suggests this.”

This is a decision that the supervisor made unilaterally, without negotiation or dialogue with the banking sector. “We don’t negotiate with banks. This is a technical decision that we made,” De Kos said. “I indicated in 2019 that we could move in this direction, and with the pandemic we have more empirical evidence” for this. And what’s more, he’s doing this at a time when he considers the most appropriate impact on GDP growth to be “virtually zero.” Negotiations with the sector will begin now, with a public consultation process on the measure starting now.

Thanks to this change, the Bank of Spain is also not seeking to engage in the policy of dividends and remuneration of company shareholders, of which it has been very critical in recent months. “We’re not doing this for anything temporary,” De Cos said, but for four reasons, which he also explained: “First, we realized that the macroeconomic impact is almost zero and the benefits are very significant; secondly, it is very difficult to measure risks in real time and anticipate them, meaning you are less likely to make mistakes, thirdly, it allows you to do it gradually, which also reduces the potential costs of activating it and, finally, “Capital requirements will as high and average as possible”; by definition, we will have more capital that can be released in the event of an economic crisis.”

De Cos also believes that institutions that currently have large voluntary buffers will find it “easier” to comply with this new requirement, as they will be able to use it to meet the requirement set by the Bank of Spain.