Retail in­terest rates are high and will keep higher

The BoS Will Keep The Counter-Cyclical Buffer At 0% Until It Returns To A Path Of Recovery

Bank of Spain.
Bank of Spain.

POSTED BY: THE CORNER 29TH JUNE 2020.- The Bank of Spain has de­cided to main­tain the coun­te­r-cy­clical ca­pital buffer ap­pli­cable to credit ex­po­sures in Spain at 0% du­ring the third quarter of the year. It will pro­bably also do the same in the co­ming quar­ters due to the cu­rrent con­text of the co­ro­na­virus cri­sis.

It has indicated that the severe macroeconomic and financial impact of the Covid-19 crisis, along with the uncertainty associated with the start of the process of economic reactivation, require credit institutions to maintain the flow of financing to the real economy. So this is not the right time for the accumulation of this macro-prudential requirement.

In the quarters prior to the crisis, the Bank of Spain did warn of the possibility of activating this financial device in 2020. However it already said in March that the situation caused by the health crisis made it advisable not to do so. At least until the main economic and financial effects of the coronavirus had disappeared.

The aim of the counter-cyclical capital buffer is to reinforce the solvency of the banking system in phases of excessive credit growth. Also to smooth out the movements of the credit cycle and accumulate capital buffers in good times, so they can be used when conditions deteriorate.

In the current situation, the Bank of Spain has flagged that the provision of credit to the real economy by institutions is “an essential part of the strategy to mitigate the impact of the coronavirus shock and ensure that an economic recovery occurs as quickly as possible.” So it has decided to maintain the counter-cyclical cushion at the minimum level of 0%, confirming its intention not to raise it for a prolonged period of time.

This decision has been taken in line with the recent cautious forecasts from the European Central Bank (ECB), the European Banking Authority (EBA) and the Basel Committee on Banking Supervision in response to Covid-19. These institutions have advised a coordinated reduction of this cyclical macro-prudential instrument by the relevant national authorities. Furthermore, where appropriate, the use of this cushion by credit institutions to absorb possible losses and thus facilitate the continued provision of credit to the real economy.

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