Countercyclical capital buffer

Addressed risks

The countercyclical capital buffer (CCyB) aims at counteracting excessive credit growth and at reducing the procyclicality of the financial system in Liechtenstein. Additional capital should be built-up when cyclical systemic risks are accelerating to increase the resilience of the banking sector in periods of stress. The CCyB should contribute to preserve credit supply in times of crisis and to dampen the downturn of the financial cycle. Simultaneously, the CCyB should also avoid excessive loan growth in the upswing of the financial cycle. The CCyB is limited between 0% and 2.5% of risk-weighted assets and must be held in common equity tier 1 (CET1) capital in addition to the regulatory minimum capital requirement and other regulatory capital requirements. A failure to achieve the capital buffer requirements results in distribution restrictions and the creation of a capital conservation plan.

In Liechtenstein, the legal basis for the CCyB was established with the adoption of the CRD IV package into national law. The CCyB is, in principle, available since the law came into force on 1 February 2015.

Method and calibration

The ESRB recommendation (ESRB/2014/1) builds on the insights and guidance of the Basel Committee on Banking Supervision (BCBS) and includes the following key elements.

• As the starting point for the calibration of the CCyB, the so-called credit gap is calculated, i.e. the deviation of the indebtedness of the private sector relative to GDP (credit/GDP) from its long-run trend. The credit gap is calculated as the difference of the credit-to-GDP ratio and its long-run trend.
• The rule-based, standardized approach proposes a benchmark buffer rate for the CCyB based on the calculated credit gap. When the credit gap is smaller than 2 percentage points, the size of the CCyB is 0%. Instead, when the credit gap is between 2 to 10 percentage points, the CCyB increases linearly from 0% to 2.5% in quarter percentage points. If the credit-to-GDP gap is above 10 percentage points, the CCyB should be set at the maximum level of 2.5%.
• This rule-based approach is complemented with additional quantitative and qualitative indicators to account for various cyclical systemic risks (e.g. mortgage prices, credit development, current account imbalances, soundness of the bank balance sheets, indebtedness of the private sector, mispricing of risks etc.).

While the proposed calibration of the credit gap considers standard variables, which are usually published by central banks or statistical offices, data availability is limited in the case of Liechtenstein.

• For this reason, private sector indebtedness has to be approximated based on two variables: On the one hand, the mortgage volume is available in the bank statistics back until 1972. However, it captures mortgages provided by Liechtenstein banks for the whole Swiss Franc currency area, i.e. it includes cross-border credits to Switzerland. On the other hand, private household indebtedness is available from tax statistics since 2001. The figure is however not comparable to other countries, because it is not based on consolidated debt volumes (i.e. credit within the household sector is also captured). Both indebtedness indicators are only available on an annual basis, and the time series have to be extended with corresponding proxies from supervisory banking data.

• GDP numbers are also published with a long delay, because they are based on tax statements by households and corporations. Additionally, official GDP numbers are only available from 1998. We therefore extend the GDP time series back until 1972 by using data from Brunhart (2012). The flash estimate for annual GDP numbers is published with a delay of 15 months, with final numbers are published 23 months after the year has ended. Since the calculation of the credit gap requires timely data on debt and GDP, the FMA uses an internal model to backcast GDP based on the quarterly business survey. Based on these estimations, potential output is estimated using standard methods, and all debt-to-GDP ratios are then calculated based on the potential output estimate.

Measure 

The countercyclical capital buffer is calibrated on a quarterly basis. The Financial Stability Council discusses the appropriate level of the countercyclical capital buffer rate in its quarterly meetings and issues a recommendation for the level of the countercyclical capital buffer once a year, provided that no change in the level of the buffer is recommended in between. Current developments are available in the section Warnings and recommendations.

Sources:

• Recommendation of the European Systemic Risk Board of 18 June 2014 on guidance for setting countercyclical buffer rates (ESRB/2014/1)

• Brunhart, A. (2012). Liechtensteins neuere Wirtschaftshistorie: Ergebnisse der ökonometrischen Verlängerung ökonomischer Zeitreihen, KOFL Economic Focus No. 4.