Germany to order banks to boost recession buffers

 FRANKFURT,May 27. German banks will for the first time be required to bolster capital buffers designed to prevent a credit crunch in case of recession, authorities said Monday.

“Financial stability risks have been built up during the long period of economic upswing and low interest rates,” the Financial Stability Commission (AFS) — which includes the finance ministry alongside the central bank and markets watchdog — said in a statement.

If the dangers manifest themselves, such as potentially undervalued risks, potentially overvalued collateral or interest rates remaining low for longer than expected, “banks could react by excessively limiting the granting of credit to the real economy,” the AFS warned.

By ordering lenders to hold an additional capital buffer equivalent to 0.25 percent of their risk-weighted assets, authorities hope they will have the funds to soak up potential losses.
That should prevent banks from turning off the credit taps in a downturn, which would have the “pro-cyclical” effect of worsening the malaise.

Felix Hufeld, head of the Bafin financial markets watchdog, told news agency DPA Monday he planned to implement the decision “likely from July 1”.

German banks and foreign lenders with exposures in Germany would have one year from that date to set aside a total across the sector of around 5.3 billion euros ($5.9 billion), Hufeld said — adding the institutions could easily shoulder the extra burden.

While all EU countries provide for setting a similar capital buffer, only six so far have actually implemented one, ranging from 0.5 percent in Denmark and Lithuania to 2.0 percent in Sweden.

Others including France, Bulgaria and Luxembourg plan to introduce them in the coming months. The German economy returned to growth in the first quarter, but observers and government institutions have all slashed 2019 growth forecasts in recent months, with the finance ministry now predicting just 0.5 percent expansion.