Germany Tells Banks to Build $25 Billion in Capital Buffers
Germany is telling its banks to rebuild capital buffers that they were allowed to deplete at the onset of the pandemic, joining other European countries in tightening regulations again as lenders take more risk.
The country’s banks have to set aside 22 billion euros ($25 billion) of capital buffers by February next year, the country’s financial authorities said on Wednesday. The vast majority have enough capital on hand to meet the regulatory demands without raising fresh funds, BaFin President Mark Branson told reporters.
“It’s time to switch to prevention mode,” Branson told reporters on a conference call. “There are decisive signals that it is time to make the financial system more resistant.”
Germany is joining countries including France and Ireland in reactivating a requirement that banks hold extra capital to help them cope with a downturn in the economy. The region weathered the worst of the pandemic’s fallout thanks for massive support from taxpayers for companies and consumers and unprecedented regulatory relief for banks.
Read this for more on Europe’s regulatory tightening
While lenders have lobbied to make some of those measures permanent, regulators around Europe have begun to tighten the reins.
“The financial cycle is continuing to expand and more strongly than before the pandemic as well as stronger than in other European countries,” Bundesbank Vice President Claudia Buch said on the call with Branson. “There’s a risk that macroeconomic risks might be underestimated.”
She cited risk premiums on debt that are lower than before the pandemic and high valuations for assets on financial markets as areas of concern. House prices and mortgage lending are also growing and while there hasn’t been a “strong erosion” of lending standards, “one can easily imagine that if prices were to drop, then securities might not suffice to compensate loan losses,” she said.
The 22 billion euros in capital breaks down as 17 billion euros for the countercyclical buffer and a further 5 billion euros for German residential mortgages, according to Branson. There is a total shortfall of less than 200 million euros at a “few” banks, he said.
In 2019, when Germany last told banks to set aside capital for a rainy day, the industry argued that the measure could backfire and cause a downturn. Branson said on Wednesday that he doesn’t expect the new buffers to cause a credit squeeze.
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