The Bank of Spain will require banks to provide an additional capital buffer of $7.5 billion against future crises.

Although there are no clouds on the horizon yet that would allow us to suspect any new type economic or financial stormThe Bank of Spain decided to anticipate and announced that it will require financial institutions, starting from the fourth quarter of 2024, to begin providing new capital buffer of 1% (total about 7.500 million), which will be activated gradually (in two stages) and which must be fully completed in the fourth quarter of 2026, two years later.

The ultimate goal is that this cushion, accumulated in good times, can be “released” in a crisis situation to allow financial institutions do not turn off the credit tap for solvent families and companies despite the worse economic situation and thereby avoid a deepening recession. Hence the name “countercyclical capital buffer”.

“We are going to activate the capital buffer to 1% gradually to give businesses the opportunity to finish it slowly,” the Governor of the Bank of Spain said. Pablo Hernandez de Cosat a meeting with the media.

Just a month before De Cosa’s term as head of the Bank of Spain expired (June 12), he separated the decision on the counter-cyclical cushion from this circumstance and from a possible attempt to leave a legacy of prudence after six years in charge. : “The Bank of Spain makes decisions based on technical analysis. Already in 2019, we took the first step to prepare the market. Then, during a pandemic, it was absurd to make this decision. We’ve been waiting for the pillars of the economy. Coincidentally, this comes just weeks before the governor’s powers are renewed, but this decision has been in the making for a long time. No precipitation element“, De Cos decided.

Two phases

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

In the second stage, a year later, the process will be repeated to increase it by another 0.5 points, starting in the fourth quarter of 2025, and this amount will be paid in fourth quarter 2026.

Macroprudential tool

According to the Bank of Spain, the countercyclical capital buffer is macroprudential instrument designed to strengthen solvency banking system through accumulation of capital in phases of economic prosperity – this is when systemic risks usually arise – to be used later, when risks that could affect financial stability materialize.

This is an instrument that has existed in the Basel Accord regulatory framework since 2016 and has not yet been activated in Spain, but has 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 solutions

In fact, what the Bank of Spain has now decided is:start the procedure revising the basis for establishing a countercyclical capital buffer and establishing its corresponding percentage starting from the fourth quarter of 2024,” the governor explained. public consultation period and financial institutions that have already expressed their opposition to a possible measure of this type will be able to submit their comments on the proposal of the Bank of Spain.

Strictly speaking, the Bank of Spain adopted two solutions.

The first one structural character. It lies in the fact that from now on the decision to activate (or inactivate) the countercyclical capital buffer can be made not only when leading indicators predict a crisis (for example, a bubble in the real estate market), but also at such moments when, as the current situation, 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).”

Second solution – opportunistic. It consists of activating the buffer, setting it at 1% and gradually applying it 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 a countercyclical capital buffer may have an automatic translation in the form lower ability of organizations to provide loans at present (in exchange for the ability to continue to give it in times of future difficulty).

However, as the head of the Bank of Spain himself explained, the current cocktail of indicators macroeconomic (GDP and employment), financial (credit and real estate), market and banking system (profitability, doubtful loans, interest margins), which led to the decision to apply a countercyclical buffer, currently suggests that the measure will have “zero” impact on economic growth. “The effect may be zero, given the dynamics of economic growth and the profitability of enterprises, which is now higher,” he explained.