Financial stability and macroprudential policy

The macroprudential tools

The Law 10/2014 of 26 June 2014 on the regulation, supervision and solvency of credit institutions, together with the Royal Decree 84/2015 and the Circular 2/2016 set out the competence of the Banco de España for deciding on and implementing macroprudential measures for the banking sector in Spain.

The macroprudential instruments at the disposal of the Banco de España in the current legislation include:

  • The countercyclical capital buffer (CCyB): a capital requirement for all banks during the upswing phase of the credit cycle. The CCyB is aimed at taming excessive growth of total credit (or a segment thereof) above sustainable levels. This buffer allows banks to build up resilience during the “good times” in order to be able to absorb potential credit losses during the downturn of the credit cycle, thereby minimizing the negative impact of a reduced flow of bank credit to the real economy during “bad times”. The Banco de España shall set the CCyB rate for credit exposures located in Spain with a quarterly frequency.
  • Capital buffers for systemically important institutions: this requirement applies to those banks of greater systemic importance, with the objective of mitigating moral hazard issues (stemming from their size and other structural features). These buffers seek to offset the potential competitive advantage enjoyed by these institutions in funding markets as a result of their systemic footprint. Capital buffers enhance the banks’ resilience and consequently, reduce the probability of default and limit the negative externalities that may pose to the financial system as a whole. The Banco de España shall review on an annual basis the list of banks deemed of systemic importance and, accordingly, set their capital buffers.
  • The Systemic Risk Buffer: This instrument seeks to prevent or mitigate a-cyclical (i.e. structural) systemic risks that are not addressed by the capital buffers for systemically important institutions. It is an optional instrument that may be implemented either for all or only for a subset of banks.
  • Measures under Article 458 of Regulation (EU) No. 575/2013: The systemic risks that threaten the financial stability at the level of a Member State of the EU -and that cannot be appropriately addressed by means of any of the abovementioned buffers- may warrant the adoption of macroprudential measures relating to: (i) the level of own funds; (ii) requirement for large exposures; (iii) public disclosure requirements; (iv) the level of the capital conservation buffer; (v) liquidity requirements; (vi) the risk weights for targeting asset bubbles in the residential and commercial property sector, or (vii) the intra financial sector exposures.
  • Limits to sectoral concentration: These limits may be set when the amount of banks’ exposures to a certain sector of economic activity is deemed to pose a systemic risk.
  • Limits and conditions on lending (borrower-based measures), and on the purchase of fixed-income securities and derivatives by banks: These include, for example, limits to loan-to-value (LTV) and loan-to-income (LTI) ratios. These instruments may be applied to prevent an excessive increase in risk-taking by banks and/or in the level of indebtedness of economic agents (households, firms).

Besides, the Banco de España takes other macroprudential policy actions, mainly in the context of complying with Recommendations issued by the European Systemic Risk Board (ESRB). In particular, Banco de España assesses, on an ad hoc basis, requests to apply voluntary reciprocity arrangements of certain macroprudential measures implemented in other EU Member States.

The macroprudential policy of the Banco de España is informed by an analytical and methodological framework developed in-house. In particular:

  • A heat map of vulnerabilities for the regular analysis of risks in Spain: this monitoring tool draws on a more than one hundred macrofinancial indicators.
  • A top-down stress-testing tool, named FLESB (Forward Looking Exercise on Spanish Banks), which is used for analysing the resilience outlook for Spanish banks under alternative macroeconomic scenarios.