Potential impact of introducing a neutral positive countercyclical capital buffer in EU countries

Abstract

The aim of this study is to assess the potential to introduce a positive neutral rate for the countercyclical capital buffer (nCCyB) at 0.5%, 1%, 1.5% and 2% in 20 EU countries over the period 2014Q4 up to 2023Q3. Prudential data at country-level was used to estimate the level of banks’ voluntary management buffers, which were found to be significant overall (although gradually decreasing) and enough to accommodate the introduction of the nCCyB. According to estimations, introduction of the nCCyB at those rates would have reduced banks’ management buffers on average by 6.5-26.0%. However, there is visible heterogeneity among EU countries. The resulting lowest decrease in capital headroom following the potential introduction of the nCCyB was recorded, among others, in Sweden, Czech Republic, Slovakia, Malta, Ireland, with the highest in Spain, Croatia, Greece, and Austria. However, the adoption of the nCCyB in recent years faces several hurdles, which constitute challenges for banks and policymakers alike.