June 28 2024: The European Central Bank (ECB) has advised Euro zone countries to maintain or even increase bank capital buffers, citing record profits in the sector and looming economic uncertainties. This recommendation comes despite a significant slowdown in lending over the past year due to the ECB’s high interest rates, which have deterred borrowers and lenders and deflated housing bubbles in wealthier nations like Germany.
The ECB emphasized the importance of these buffers, which are meant to help banks absorb potential losses, particularly as property prices remain high and debt levels are elevated in some countries.
“The Governing Council supports national authorities planning to increase capital buffer requirements,” the ECB stated, pointing out that banks have been earning record interest on their deposits at the ECB and therefore have sufficient capacity above current capital requirements.
The ECB further highlighted the desirability of building up releasable capital buffer requirements to address vulnerabilities and enhance macroprudential space in certain countries, given the favorable banking sector conditions that limit procyclicality risks.
Currently, the Netherlands has the highest countercyclical capital buffer at 2% of bank assets, followed by Germany at 0.75% and France at 1%.
Additionally, the ECB supports maintaining restrictions on mortgage lending, which include limits on how much customers can borrow relative to their income or the value of their property.
