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Staff Working Paper Series #2 - Measures of banks’ capital buffer usability under prudential and resolution requirements in the Banking Union

Abtract: This paper estimates banking sector’s capital buffer usability taking into account how the solvency framework, the leverage ratio (LR) framework and the resolution requirements interact to ensure that banks meet adequate levels of capital instruments at all times. A number of estimates are provided in this paper. The sample of banks assessed covers the resolution groups among the significant institutions of the banking union under the remit of the Single Resolution Board (SRB). 

The methodology that we describe and apply aims at enriching and fostering the debate on capital buffers usability, also taking stock from the work recently carried out by a number of European and national authorities with a mandate to ensure financial stability. Our contribution provides measures that also take into account both prudential and resolution requirements. The analysis finds that, on aggregate, usability of buffers based on risk-weighted assets is limited by the combined application of the prudential leverage ratio and MREL requirements. The overall capital buffer usability grows substantially when the different risk-weighted and leverage requirements for resolution and prudential purposes are taken into account, as per the comprehensive approach that we present.