No. 30 - Overlaps between minimum requirements and capital buffers: the case of Italian banks

The term 'buffer usability' refers to the possibility for banks to use the capital buffers included in the Combined Buffer Requirement (CBR) without simultaneously breaching any other binding regulatory requirements; if instead some or all of the capital set aside to meet the CBR is needed to satisfy other minimum requirements as well, such an overlap would hamper the buffer usability. In this work we investigate the mechanics of the interaction between minimum requirements and buffers by developing a comprehensive methodology aimed at measuring the actual usability of the CBR. Such a methodology takes into account all four EU regulatory requirements simultaneously: the risk-weighted one (RW), the leverage ratio (LR), the riskweighted MREL (MREL-RW) and the leverage-ratio-based MREL (MREL-LR). This means that we consider not only the CBR stacked on top of the RW requirement, but also the CBR placed on top of the risk-weighted MREL. According to our methodology, the overlap between minimum requirements and capital buffers affects about one fourth of Italian banks and reduces the CBR's usability to 74 per cent of its theoretical value, compared with a mere 27 per cent if the CBR placed on top of the MREL-RW is not taken into account. When the CET1 absorbed by the MREL-RW requirement is higher than the CET1 absorbed by the RW one, the CBR may be more usable than is apparent from the approach based solely on the RW requirement. This explains why, by also considering the regulatory requirements of the resolution framework, the usability of the CBR increases. The issue of the overlap is being debated at international level by the main financial authorities and the standard setters.