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Market Analysis

ECB Urges Countries to Increase, Not Reduce Bank Capital Buffers
Amos Simanungkalit · 6.7K Views

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The European Central Bank (ECB) has advised against reducing bank capital buffers in the euro zone and suggested that some countries may need to increase them, given the current high profitability in the banking sector and potential economic uncertainties. Lending activity in the euro zone has been significantly subdued due to the ECB's higher interest rates, which have discouraged borrowing and contributed to cooling housing markets in countries like Germany.

Despite record profits among banks, largely driven by the interest rates they earn on deposits at the ECB, the ECB emphasized the importance of maintaining buffers to absorb potential losses. It highlighted persistent overvaluation in property markets and high debt levels in certain countries as reasons to bolster these buffers.

The ECB's statement supports national authorities considering higher capital requirements for banks, aiming to strengthen their resilience and enhance macroprudential safeguards. It specifically noted that some countries may benefit from increasing releasable capital buffers to mitigate vulnerabilities, especially given current conditions in the banking sector that mitigate risks of cyclical fluctuations.

Currently, the Netherlands maintains the highest countercyclical capital buffer at 2% of bank assets, while Germany and France have set theirs at 0.75% and 1% respectively. Additionally, the ECB endorsed maintaining existing restrictions on mortgage lending, including limits on loan-to-income ratios and property values, as a measure to safeguard financial stability.

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.

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