National Bank keeps countercyclical capital buffer for financial institutions at 0%
On 17 May 2022, the National Bank of Belgium (NBB) decided to maintain the countercyclical buffer rate (CCyB) at 0% for the third quarter of 2022. Belgian financial institutions are therefore not required to build any additional buffers to counter risks related to their supply of credit to the real economy in Belgium.
In order to tackle procyclicality in the financial system, prudential authorities have an efficient tool at their disposal: the countercyclical capital buffer (CCyB). This is a temporary buffer that is built up during the upward phase of the credit cycle to ensure banks have sufficient margin to cover credit losses during the downward phase of the credit cycle. This also helps maintain the supply of credit to the economy and dampen the downswing of the financial cycle.
The NBB takes a decision on this issue every quarter, in accordance with its powers under the 2014 Banking Law.
In March 2020, at the beginning of the pandemic, the NBB released this macroprudential capital buffer worth around € 1 billion in order to provide additional room for Belgian banks to (1) recognise, in a timely and conservative way, potential credit losses, (2) boost lending to the private sector and (3) finance moratoria and other debt restructuring solutions for viable borrowers experiencing temporary or more structural repayment problems with bank loans.
At the start of 2022, the need for such support to help banks play their critical role in an economic crisis was significantly less as the economic recovery from the pandemic gathered pace and asset quality indicators further improved. At that time, nominal credit growth indicators also showed renewed dynamism that was comparable to the situation in 2019 when the activation of the CCyB was first announced in Belgium. Before the start of the military conflict in Ukraine in late February, macro-financial conditions therefore seemed to suggest the need to consider a re-activation of the CCyB.
Yet, very expensive energy and commodities, high inflation, rising interest rates and high volatility in financial markets have injected a lot of uncertainty regarding macro-financial developments since the war began. With an eye on the most appropriate macroprudential policy stance, the NBB is monitoring and analysing the impact of these factors on the level of cyclical risks and on the probability of tail-risk scenarios for financial stability. At the same time, banks’ credit risk provisions for the first quarter of 2022 suggest that Belgian credit institutions are very sanguine about potential credit losses that they could suffer in the next few quarters as a result of the most recent developments. Also, the available asset quality indicators are not (yet) flagging up any increased incidence of loan repayment problems.
Re-activation of the CCyB in September under consideration
While uncertainty is expected to remain high in the coming months, more hard data and anecdotal evidence will be available in September as regards the impact of war-related developments on (1) the financial cycle and the dynamism of bank credit to Belgian households and non-financial corporations and (2) credit risk in Belgian banks’ lending to these counterparties. In the absence of any clear signs by September of a material impact of the war in Ukraine on (1) the financial cycle and the dynamism of bank lending to households and non-financial corporations or (2) the credit quality of the loans to these counterparties, the NBB believes that a re-activation of the CCyB will then be fully justified in order to make sure that Belgian banks’ have the necessary resilience to fulfil their key functions for the real economy and help borrowers with loan repayment difficulties in the event of a future adverse economic growth scenario and/or downturn in the Belgian real estate market.
If the CCyB rate is re-activated in September, it would be fixed at 0.5 %. The implementation period for the banks would nevertheless be reduced to six months (instead of the standard 12 months), a possibility that is explicitly provided for in the EU Capital Requirements Directive under “exceptional circumstances”. This means that, if it is triggered again, the CCyB will have to be constituted by banks by 1 April 2023. As Belgian banks have strong solvency positions, with ample capital headroom, and high profitability, they are able to accommodate this higher macroprudential capital requirement without changing their credit policy for Belgian households and non-financial corporations. If necessary, the NBB can of course at any point in time decide to release the CCyB again, as was the case at the beginning of the pandemic.