Spain Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

The introduction of macroprudential policy instruments to complement monetary and fiscal policy is probably one of the most significant policy developments since the global financial crisis. For countries in a monetary union, the introduction of these tools is particularly important since it is one of the few domestically managed levers available to guarantee stability in the domestic financial system.

Appropriate use of macroprudential tools requires the development of: (i) suitable institutional arrangements, conferring powers on authorities and establishing coordination mechanisms among them; and (ii) a comprehensive policy framework that clearly sets the aims for these tools to make them operational.

To accomplish this, the Spanish Macroprudential Authority – Financial Stability Board (AMCESFI) was created early in 2019. The range of macroprudential tools available to the Spanish sectoral financial supervisors, which remain individually responsible for activating these tools, was also extended. For example, the Banco de España is now empowered to establish countercyclical capital buffers (CCyB) specifically for particular credit segments, apply sectoral concentration limits and set minimum underwriting standards. These new instruments complement those already available to the Banco de España under European legislation: the countercyclical capital buffer, the systemic risk buffer and the buffer for systemic banks, among others.

Systemic risk, unlike inflation or the public deficit, is multidimensional. This is why having different macroprudential tools at the disposal of the macroprudential authority is crucial. However, it is not always obvious determining how to make best use of each tool. For example, according to the Basel III framework, the CCyB should serve: (i) to build up resilience among banks against the reversals that follow periods of credit exuberance; (ii) to actively combat excessive credit growth; and (iii) to allow for the accumulation of shock absorption capacity to be used in the downward phase of the cycle.

In many macroeconomic and financial contexts, the activation of the CCyB will be justified by the three abovementioned objectives simultaneously. However, there have been numerous examples of economic recessions not preceded by excessive credit growth. Thus, should these buffers be exclusively built up when the credit cycle is in a boom phase, or when the business cycle is expanding?

In my view, the main argument for the use of the CCyB to accumulate loss-aborbing capacity, even when there is no evidence of the emergence of excessive credit growth, is that when a recession comes, borrowers' default rates rise, negatively affecting profitability and the capital position of banks. When banks do not have a sufficient level of capital to absorb such a deterioration or cannot use their capital buffers, they tend to restrict credit and, as a result, compound the economic recession.

For the moment, the bulk of macroprudential tools affects banks exclusively. With the increasing role of non-bank financial intermediaries this may give rise to regulatory arbitrage and undermine the overall effectiveness of macroprudential tools.

All in all, and with limited experience so far, a principle of 'guided discretion' should be used to conduct and fine-tune the macroprudential policy framework. And, of course, having adequate communication is also critical.