Capital Buffers

Pursuant to the amendments of the Banking Law from October 2016, in addition to the capital adequacy requirements, determined with the National Bank Regulation or with the corrective measures undertaken by the National Bank, banks are also required to maintain an appropriate amount of capital to cover the so-called capital buffers. There are four types of capital buffers prescribed with the amendments:

1)    capital conservation buffer determined at the level of 2.5% of the risk weighted assets;

2)    countercyclical capital buffer which may amount up to 2.5% of the risk weighted assets, or higher, depending on other systemic indicators and aims to limit risks associated with the credit growth. The countercyclical capital buffer can be different for the exposures in the Republic of North Macedonia and for exposures in other countries. The National Bank is authorized to determine the level of both rates, where the countercyclical capital buffer for exposures in the Republic of North Macedonia is defined based on the methodology prescribed by the National Bank;

3)    capital buffer for systemically important banks which may range from 1.0% to 3.5% of the risk weighed assets and which should be allocated by the banks that are identified as systemically important banks based on the methodology prescribed by the National Bank; and 

4)    systemic risk capital buffer which may range from 1.0% to 3.0% of the risk weighted assets and is introduced by the Governor of the National Bank in order to limit the risk of disrupting the financial system or the national economy. This capital buffer can be different for different banks or groups of banks.   

The main reason for the existence of the capital buffers is to strengthen banks' solvency position and to increase their resilience to unforeseen losses, which enables strengthening of the stability and safety of the banking system and of the overall financial system. 

The manner for determining individual capital buffers follows the requirements of the so-called Basel 3 and the relevant European directive. The prescribed capital buffers can only be met with positions of the Common Equity Tier 1 capital (CET1) which are not used for covering capital adequacy requirements, defined with the National Bank's regulation or with the National Bank's corrective measures (so-called excess CET1). The bank that does not have sufficient amount of CET1 for covering the total amount of capital buffers (ratio between excess CET1 and total amount of capital buffers is lower than 100%), is limited in terms of distribution of earnings (maximum distributable amount), as follows:

-        no distribution is allowed, if excess CET1 is lower or equal to 25% of the total amount of capital buffers;

-        20% of the earnings can be distributed, if excess CET1 is higher than 25% but lower or equal to 50% of the total amount of capital buffers;

-        40% of the earnings can be distributed, if excess CET1 is higher than 50% but lower or equal to 75% of the total amount of capital buffers;

-        60% of the earnings can be distributed, if excess CET1 is higher than 75% but lower or equal to 100% of the total amount of capital buffers;

-        there are no distribution restrictions, if excess CET1 is equal or higher than the total amount of capital buffers.

The limited distribution of earnings is applied until the bank has enough excess CET1 to cover the total amount of capital buffers, i.e. CET1 which remains after meeting the prescribed capital adequacy ratio.

The manner for determining the maximum distributable amount of earnings, as well as the manner and deadlines for reporting to the National Bank on the level of this amount are prescribed in the Decision on the Methodology for determining maximum distributable amount ("Official Gazette of the Republic of Macedonia" no. 26/17) and the Instructions for Implementation of the Decision on the Methodology for determining maximum distributable amount ("Official Gazette of the Republic of Macedonia" no. 34/17).