Analysis of the Effectiveness of the liberalisation of the countercyclical capital buffer during the Covid-19 pandemic: Prudential misconceptions of capital and liquidity requirements

1. Monetary policy during the Covid-19 pandemic

2. The regulatory framework of Basel III

3. Relaxation of the countercyclical capital buffer

4. Enhancing liquidity requirements for commercial banks

“promote the short-term resilience of the liquidity risk profile of banks […] by ensuring that they have sufficient HQLA [High-Quality Liquid Assets] to survive a significant stress scenario lasting 30 calendar days“

(Basel Committee on Banking Supervision, 2013, p. 4).

5. Conclusion

“The author does a good job of explaining what the ECB and various national authorities did. And he is right that merely relaxing regulatory requirements during ‘bad’ times does not guarantee that banks will take advantage of it and lend more. However, this is complicated territory to unpick. The author notes that euro-area lending rose by €4 trillion during the first year of the pandemic, whereas the ECB’s own analysis suggests that the reduction in counter-cyclical capital buffer permitted less than €2 trillion extra lending.”

A short excerpt of comments by Professor Charles Bean

References

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