Basel Committee publishes evaluation of buffer usability and cyclicality in its regulatory framework; issues newsletter on positive cycle-neutral countercyclical capital buffer rates

• New evaluation report finds some indications of a positive relationship between banks' capital headroom and lending and further evidence that temporary reductions in capital requirements supported lending during the Covid-19 pandemic.
• Report finds limited evidence that banks' reluctance to use liquidity buffers has affected their lending and market activity, and little sign of procyclical effects on lending during the pandemic related to the introduction of the expected credit loss (ECL) framework.
• Basel Committee stresses the importance of the prudent build-up and use of buffers at banks to smooth the impact of internal and external shocks.

The Basel Committee on Banking Supervision today issued a second report on its evaluation of the impact and effectiveness of implemented Basel reforms. Buffer usability and cyclicality in the Basel framework sets out the Committee's evaluation findings relating to the areas of the Basel regulatory framework identified as warranting further consideration in its previous report Early lessons from the Covid-19 pandemic on the Basel reforms.

New empirical work based on the Committee's global bank-level data finds some indications of a positive relationship between lending and banks' capital headroom (ie the surplus of a bank's capital resources above all minimum regulatory requirements and buffers), which is consistent with previous analysis. Empirical evidence also shows that temporary reductions in capital requirements supported lending during the Covid-19 pandemic, although the evidence is weaker for countercyclical capital buffer (CCyB) releases, which may reflect the limited use of the CCyB to date.

The report finds little evidence to suggest that reluctance by banks to use liquid asset buffers has affected their lending and market activity, given the short-lived nature of the liquidity pressures during the pandemic. Similarly, the analysis finds little sign of procyclical effects on lending during the Covid-19 pandemic related to the introduction of the expected credit loss (ECL) framework.

The report will inform the Financial Stability Board's final Report on exit strategies to support equitable recovery and address effects from Covid-19 scarring in the financial sector, which is to be submitted to the G20 Leaders' summit in November 2022.

Given the findings in the evaluation report, as well as the longer-term impacts of the pandemic, ongoing geopolitical events and the potential for new risks to emerge, the Committee stresses the importance of the prudent build-up and use of buffers at banks to smooth the impact of internal and external shocks. To increase the capital buffers that can be explicitly released in the event of sudden shocks, including those unrelated to the credit cycle, such as the impact of the Covid-19 pandemic, some authorities have set a positive cycle-neutral countercyclical capital buffer rate. In a newsletter also published today, the Committee notes its support for the ability of authorities to take this approach on a voluntary basis.