The macroeconomic impact of changes in economic bank capital buffers Prepared by Derrick Kanngiesser, Reiner Martin, Diego Moccero and Laurent Maurin

Economic bank capital buffers are a good indicator for capturing banks’ constraints in providing lending to the economy. Economic bank capital buffers are computed as the difference between the actual and the target economic capital ratio (country-level capital buffers are computed as a weighted average, using total assets, of the bank-level buffers). When actual capital ratios are above the target (positive buffer), banks have room to keep expanding and lending more to the economy. However, when the target capital ratio is above the actual ratio (negative buffer), banks may need to adjust lending (and the pricing of loans) in order to attain the target economic capital level.
Aggregate economic bank capital buffers for the four countries under consideration fluctuated considerably during the period covered in this article, namely between the first quarter of 2005 and the fourth quarter of 2018 (see Chart 1). The buffers started to decline during the period of economic expansion from 2005‑07 and declined strongly at the height of the international financial crisis (2009 and 2010). After recovering briefly, the buffers declined again during the euro area sovereign debt crisis in 2012. Subsequently, the buffers narrowed and turned positive towards the end of the review period. These developments are in line with the observed increase in actual bank capital ratios.
Chart 1
Economic bank capital buffers fluctuated largely since 2005

Sources: DataStream, ECB and Eurostat.
Notes: The capital buffer is defined in percentages. The sample spans the period from the first quarter of 2005 to the fourth quarter of 2018.
Chart 2
Macroeconomic and banking variables deteriorated during the international financial crisis and the euro area sovereign debt crisis, together with the decline in economic bank capital buffers

Sources: ECB and Eurostat.
Notes: Real GDP growth, inflation and corporate and mortgage lending are computed as the log difference of the respective variable multiplied by 100. The corporate and mortgage spreads are defined in percentages. The sample spans the period from the first quarter of 2005 to the fourth quarter of 2018.