ECB and ESRB joint report on buffer usability

The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) have published a joint report on the usability of capital buffers. The report analyses how prudential and resolution frameworks interact, and how this interaction may limit buffer usability.

Key takeaways include:

• Prudential and resolution frameworks are distinct but complementary. Their interaction is complicated. In particular, the report notes that the way common equity tier capital may be used to satisfy multiple requirements may limit its ability to absorb losses.
• In addition to the double-counting of capital, resolution frameworks can impact buffer usability when authorities use their discretionary powers to apply restrictions relating to the maximum distributable amount related to MREL.
• To evaluate the macroprudential impact of the relationship between the frameworks, a consistent methodology is needed. In line with this, the report defines the following key concepts: buffer usability; releasability; capital headroom; and loss-absorption capacity. It also provides a methodology for quantifying and evaluating these concepts. In addition, the report has developed the analytical framework, and updated the buffer usability simulation tool which has been used by national authorities in recent years.
• A key difference between the regimes which creates challenges is the different prudential and resolution consolidation perimeters which may be applied (for example, the perimeter may be applied at the highest level of consolidation, or at a sub-consolidated level). The report highlights this issue and provides guidance on how to address it.
• Limited buffer usability increases the risk of banks breaching minimum requirements during stress, and the interaction between prudential and resolution frameworks may limit authorities' abilities to create additional capital headroom, which could harm the real economy and impact financial stability.

The report does not make policy recommendations and is only intended to serve as a shared reference point and analytical basis for future policy discussions.

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