STANDPOINT OF THE CZECH NATIONAL BANK
on the consultation document
Countercyclical Capital Buffer
In general
We welcome the fact that, in designing the policy set out in the consultative document,the European Commission based its approach on the Basel Committee's proposals. Whenever it is possible, we find it desirable to avoid discrepancies between regulation set out in binding EU legislation and corresponding recommendations issued by the BCBS.
The imposition of the counter-cyclical capital buffer provides national authorities with a macroprudential tool, which will enable them to give an across-the-board response to a potential build-up of the risks that are mainly associatedwith credit expansion and asset prices growth. Allowing for a slight exaggeration, it can be stated that, in its essence and meaning, the countercyclical capital buffer can play a macroprudential policy role which is similar to the role of monetary policy rates in monetary policy.
Even though it is possible to assume, in accordance with the conclusions of past studies, that the tool's ability to dampen credit expansion in good timeswill be limited, however, in combination with other changes in the regulatory framework proposed in Basel III, it could contribute to strengthening the resilience of the banking sector.
A key role of this macroprudential tool will be in terms of its communication, enabling national authorities to effectively express their views on the risks associated with the credit cycle and thus enhance their credibility.
In terms of the scope of application and considering the logic of the matter, we perceive this macroprudential tool as a tool to be used across the board (i.e. not applicable to institutions individually, on a so-called case-by-case basis). However, we also understand that there is some discretion for national authorities, which should allow a degree of flexibility in their decision-making (e.g. the option to exclude a certain type or group of institutions, the application of the principle of immateriality).
We principally reject the two alternative options for the determination of the buffers as they were designed by the European Commission (alternative methods A and B) and we support the application of the basic method as it is proposed in the original document of the BCBS. We reject the alternative options not only because we are a country where the banking sector is dominated by foreign-owned institutions, but also because they are contrary to the nature of the countercyclical capital buffer as a macroprudential tool.
Standpoints and answers to questions relating to specific areas
1. Could the general orientations indicated above foster a build-up in bank capital in good times and facilitate its release in bad times? Would you prefer the approach to determining the bank-specific buffer add-on as set out in paragraph 12, or would you prefer the alternatives set out under A. and B? Please give reasons for your answer.
We consider the method of determining and releasingthe countercyclical capital buffer as proposed by the BCBS, which the European Commission adopted, to be a well-reasoned compromise. A key function must be performed by national authorities, and they must be guaranteed discretion in both determining the bufferand timing the release of thebuffer.
Regarding the choice of the methods of application, we have a strong opinion that it is adequate to follow the BCBS proposal and work towards a consistent method of application, i.e. according to the country of the given exposure's obligor. Linking the buffer to the country where the credit was extended is far more prone to regulatory arbitrage. It is also totally unacceptable for the Czech Republic, whose banking sector is dominated by foreign banks. Credit can be extendedto the final customer by any entity (there are no limits, in particular, under the regime of the branches), thereby linking the buffer to the country where the credit was extended is misguided if the buffers recommended for exposures in different countries are different.
2. Would the approach for dealing with internationally active banks set out in paragraphs 12 to 20 help ensuring a level playing field between domestic and foreign (located in other MemberStates and third countries) banks? Could there be an incentive for regulatory arbitrage since credit institutions may gain benefits from booking exposures in jurisdictions with lower capital add-ons? Which of the three alternatives reduces the chances of regulatory arbitrage? Are there other ways in which potential regulatory arbitrage could be mitigated?
The risk of regulatory arbitrage can never be eliminated entirely and, to some extent, counter-cyclical capital buffers may be its subject. However, from our point of view (see response to Question 1) the method proposed by the BCBS represents the least unfortunate option, because the location of the obligor is less susceptible to manipulation. If capital requirements happened to play a bigger role in setting interest rates, the situation could lead, inter alia, to a shift in the geographical location of the obligors (e.g. in the case of multinational companies). Nevertheless, this is not observed in practice very often and the capital requirement is only one of many factors affecting the determination of interest rates.
3. Should the buffer requirement apply at a solo, sub-consolidated and consolidated basis (i.e. in accordance with the scope of application laid down in Articles 68 to 72 of 2006/48/EU)? Should supervisors be entitled to require credit institutions to hold the counter-cyclical buffer on a solo basis?
In our view, the buffer should be applied to all of these levels (solo, sub-consolidated and consolidated), in accordance with how capital requirements are applied.
4. Could a ceiling of 2.5% for the counter-cyclical buffer limit unduly the ability of national authorities to ensure the resilience of their banking system and constrain excessive credit growth? Please explain your views on the basis of expected costs and benefits.
The ceiling of 2.5% may at certain times prove to be relatively low to ensure that this macroprudential tool is effective enough in a situation of an imminent strong credit cycle. From the perspective of a country that still converges to the core EU countries as regards the depth of financial intermediation, the risk of an overstepped credit expansion, i.e. an excessive growth of debt, must not be underestimated when looking to the future.
However, we do not think that it would be sensible to demandthe discretion to set a higher ceiling. In addition to the existing and newly proposed instruments having the form of capital buffers which are part of Pillar 1, Pillar 2 continues to be in forceas well and national authorities may apply it if necessary.
5. Should decisions for the counter-cyclical buffer be made transparent, explained and communicated to the market? Do you see a role for the ESRB in this regard? Please explain the reasons for your reply.
We believe that transparency is needed so that the market can independently get an idea of what the supervisory perspective on market trends is and compare it with the actual capital level of each institution. In our opinion, the ESRB is exactly the institution where Europe-wide discussions about the methods of determining the buffer will take place and where, possibly, there will be some debates about the suitability of the calibration in particular countries. However, the ultimate discretion to decide on establishing or releasing the buffer must lie with the national authority.
6. What are your views on the following potential roles for the ESRB and EBA:
(a) The development of principles and technical standards as regards the exchange of information and promotion of consistency of the buffer decisions?
(b) Issuance by the ESRB, on the basis of its regular risk assessments, of specific recommendations on the levels of counter-cyclical buffers established by national authorities?
(c) Oversight by the EBA to ensure that buffers decision are implemented in an efficient and harmonised way?
(d) What are your views on the possible interaction between the respective roles of the ESRB and the EBA?
In our opinion, the ESRB and EBA should only make recommendations. Decision-making power must remain with the national authority.
7. What type of own fund instruments should be used to meet the counter-cyclical buffer requirement and why?
We believe that the rules for capital requirements should be as consistent as possible. Therefore, if the first component of the capital buffer is to be covered exclusively by the highest quality capital (i.e. core Tier 1) this requirement should be applied equally to the covering of the countercyclical buffer. This principle is consistent with the BCBS consultation papers.
8. How should "exposures" be weighed to meet the objectives of the countercyclical buffer (nominal or on the basis of Risk Weighted Assets)?
Exposures should be weighted in the same way as withthe other capital requirements, i.e. on the basis of Risk Weighted Assets.
9. Should the counter-cyclical buffer apply to all exposures or be limited to certain types of exposures and if yes which? Please support your answer with reasons.
In our opinion, the imposition of capital buffers should not lead to a further increase in the complexity of regulation, so we are in favour of the application of the buffer to all exposures.
10. In your view, should investment firms be excluded from the counter cyclical buffer capital requirement? Please support your answer with expected costs and benefits.
In our opinion, investment firms can be excluded from the scope of application of the counter-cyclical buffer, because they do not generate the risk of excessive credit growth.
11. Do you have other comments or suggestions?
No.