The Bank of England stress test results are out. A comprehensive report covering this exercise can be found here.
The report surprised me a bit, because its repeatedly mentions the countercyclical capital buffer requirement. The BOE decided to keep at 1 percent. Hardly newsworthy, that percentage was announced a year ago. Still, the report mentions “countercyclical capital buffer” 16 times and explains this buffer in a dedicated box.
A one percent buffer requirement may look significant, but how does it compare with other countries? Unfortunately, the BOE does not report a break-down of banks’ individual buffers. However, the EBA comes to the rescue. For the first time, the European bank stress test results give us detailed data on buffers.
But let me explain how to calculate the buffer first.
Countercyclical capital buffer calculation
The calculation of the countercyclical buffer is convoluted. It is the result of a calculation that relies on the geographical distribution of exposures and associated capital requirements. For each country you can determine the relative weight of a bank’s exposures and capital requirements relative to their respective total values. The next step is to multiply each country-specific capital requirement weight by a country-specific buffer requirement and sum the results.
Swedbank shows you how to calculate the countercyclical capital buffer requirement, see the Excel sheet on the Swedbank IR website.
The calculation shows that the countercyclical capital buffer requirement for Swedbank is only 0.98%, even though Sweden itself applies a 1.5% requirement. The watering down is the result of two factors: i) a bank’s geographical diversification and ii) the countercyclical capital buffer requirements of other countries.
Obviously the weighing will affect the countercyclical capital buffer of UK banks. HSBC, for example, needs three densely printed pages to explain that it satisfies a 22 basis points buffer requirement.
European countercyclical capital buffers – EBA data
To put the BOE buffer requirement in perspective, see below some graphs that use the latest EBA stress test data.
Norway clearly stands out with a 1.6 percent buffer. Swedish and Danish banks also report buffers that are visible. The UK’s average buffer ratio is 7.71 basis points. This is low, but it is still higher than many other European countries.
The next graph shows the relative importance of the countercyclical capital buffers when compared with Common Equity Tier 1.
Lastly a graph that compares the countercyclical capital buffer (cyb) with the other buffers: the buffer for systemically importance (sibs) and the conservation buffer (ccb).
Again, its likely that the other buffers matter more than the countercyclical capital buffer. Which makes me wonder: why actually does the BOE devote attention to this prudential policy tool?
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