In relation to this macroprudential policy, the Banco de España is responsible for setting quarterly the so-called Countercyclical Capital Buffer (CCyB). The CCyB is a macroprudential instrument that leads to credit institutions building up a capital buffer during expansionary periods so that this buffer may be released during a subsequent contractionary phase. In this way, the CCyB strengthens the banking system’s solvency 1  See the opening address at the Second Financial Stability Conference (Banco de España/CEMFI) delivered by by the Governor of the Banco de España, “A framework for the CCyB”, June 2019. *  8/10  during growth phases, which is when risks usually build up, and helps mitigate the decline in the flow of new lending to the economy when these risks materialise. Consequently, the CCyB contributes to smoothing credit cycle fluctuations, and to increasing credit institutions’ capacity to withstand potential future losses. During 2019 Q3 and Q4, the Banco de España has kept the CCyB percentage at 0%. This decision is underpinned by a technical analysis of quantitative indicators mixed with qualitative information. The set of quantitative indicators shaping decisions on the CCyB include indicators that seek to capture developments in the credit cycle of the non-financial private sector and its excessive growth, the potential overvaluation of house prices, the effort entailed for households and firms in paying interest and repaying the principal of loans (debt service), the external deficit and the macroeconomic environment.

Indeed, in recent months the markets have lowered their expectations in terms of the growth of European banks’ profits. Low or negative interest rates restrict the unit interest margin banks can obtain. However, from a general equilibrium perspective, they also increase credit, reduce bad debts and raise the value of the financial and real assets banks hold on their balance sheets. As a result, the net aggregate effect on bank profitability in general has so far been positive overall. That said, this effect will foreseeably diminish insofar as the situation of negative interest rates is prolonged over time. Indeed, a positive note regarding the most recent developments in profitability is that net interest income has increased following years of stagnation at low levels. In any event, the decisions adopted by the ECB Governing Council at its meeting on 12 September, including the 10 bp reduction in the deposit facility rate to -0.5%, the resumption of net purchases under its asset purchase programme and the strengthening of forward guidance, have been accompanied by mitigating measures. These include the application of a two-tier system for reserve remuneration, designed precisely to ensure the effectiveness of monetary policy transmission through the bank channel. There is also theoretical and empirical evidence that low interest rates transmit the monetary impulse by encouraging banks and other financial intermediaries to take risks. Fortunately, we currently have various macroprudential policy instruments, which I shall refer to later, designed to mitigate the potential build-up of risks that may affect financial stability through this channel.