| Guidelines This chapter sets out principles for the operationalisation of the countercyclical capital buffer and sectoral countercyclical capital buffer. The contents of this chapter are based on: |
| Related standards |
| Other related publications
|
Capital buffers are a key feature of the Basel III reforms. Introduced after the global financial crisis of 2007‑09, they are intended to play an important role in ensuring a resilient banking system that is able to support the real economy through the economic cycle. Capital buffers are intended to help banks build sufficient resources in normal times so that in a period of stress they can absorb losses and continue to provide financial intermediation to avoid a disruptive reduction of lending. Capital buffers are designed to be usable.
The Basel capital buffer framework comprises the capital conservation buffer (CCoB), the countercyclical capital buffer (CCyB), buffers for global systemically important banks (G-SIBs) and domestic systemically important banks (D-SIBs), and Pillar 2 buffers. These buffers take the form of an additional layer of capital above the regulatory minimums, and must be met with Common Equity Tier 1 (CET1) capital.
The CCyB is time-varying: it can be increased by authorities when they judge that system-wide risks are building up due to excessive credit growth, to ensure the banking system has an additional layer of capital to protect it against future potential losses that may exceed the size of the CCoB and any systemic buffers. National variants of the CCyB may target sector-specific cycles, such as a sectoral CCyB (SCCyB). The CCyB (and any variants of it) is the only designated releasable buffer in the Basel Framework.
The primary aim of the CCyB regime is to use a buffer of capital to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risks. Protecting the banking sector in this context is not simply ensuring that individual banks remain solvent through a period of stress, as the minimum capital requirement and CCoB are together designed to fulfil this objective. Rather, the aim is to ensure that the banking sector in aggregate has the capital on hand to help maintain the flow of credit in the economy without its solvency being questioned, when the broader financial system experiences stress after a period of excess credit growth. This should help to reduce the risk of the supply of credit being constrained by regulatory capital requirements that could undermine the performance of the real economy and result in additional credit losses in the banking system.
By aiming to protect the banking sector from the credit cycle, the CCyB regime may also help to lean against the build-up phase of the cycle in the first place. This may occur through the capital buffer acting to raise the cost of credit, and therefore dampening its demand, when there is evidence that the stock of credit has grown to excessive levels relative to the benchmarks of past experience. This potential moderating effect on the build-up phase of the credit cycle should be viewed as a positive side benefit, rather than the primary aim of the CCyB regime.
The SCCyB targets sector-specific cycles and may be a useful complement to both the CCyB and other instruments in the macroprudential toolkit. While a bank’s additional capital requirements following an activation of the CCyB depend on its total risk-weighted assets (RWA), the SCCyB is a more targeted measure: it allows national authorities to temporarily impose additional capital requirements which directly address the build-up of risks in a specific sector. As such, the impact of SCCyB depends on sectoral credit RWA and hence on how exposed a bank is to the targeted credit segment (eg residential real estate loans).
The guidance set out in this chapter supports the operationalisation of the CCyB and the SCCyB.
This first part of this chapter sets out what is required of the national authorities responsible for operating the CCyB regime and the principles that they should follow in making buffer decisions. In addition to providing guidance for national authorities, this chapter should help banks to understand and anticipate the buffer decisions in the jurisdictions to which they have credit exposures.
The second part of this chapter aims to support jurisdictions willing to implement a SCCyB by facilitating a consistent implementation across them. Importantly, as the following guidance is not accompanied by a corresponding inclusion of a SCCyB in the Basel Framework, the SCCyB principles are only relevant for jurisdictions that voluntarily choose to implement a SCCyB at a national level.
The relevant authority1 in each jurisdiction is required to monitor credit growth and make assessments of whether such growth is excessive and is leading to the build-up of system-wide risks. Based on this assessment they need to use their judgement, following the guidance set out in this chapter, to determine whether a CCyB requirement should be imposed. They also need to apply judgement to determine whether the buffer should increase or decrease over time (within the range of zero to 2.5% of RWA2) depending on whether they see system-wide risks increasing or decreasing. Finally, they should be prepared to release the CCyB (ie set it to zero) on a timely basis if system-wide risks crystallise.3
| 1 | To account for the fact that institutional arrangements vary considerably across the world, the relevant authority to operate the buffer is left to the discretion of each jurisdiction. |
| 2 | National authorities can implement a range of additional macroprudential tools, including a CCyB rate in excess of 2.5%, if deemed appropriate in their national context. A higher CCyB rate would apply to domestic banks, including locally incorporated subsidiaries of foreign banks. However, the international reciprocity provisions do not require recognition of the amount of the buffer in excess of 2.5% of RWA. |
| 3 | Authorities can introduce a positive neutral CCyB so banks in their jurisdictions have buffers of capital in place that can be released in the event of sudden shocks, including those unrelated to the credit cycle. This approach is not a requirement but can help address concerns that banks in some jurisdictions may be reluctant to cross regulatory buffer thresholds in times of stress, but may be more willing to use their capital to support lending when buffers are explicitly released by authorities. This is discussed in more detail in Range of practices in implementing a positive cycle neutral countercyclical capital buffer (November 2024). |
RBC30 sets out the procedure that each bank must follow to determine the specific CCyB requirement, which is based on a weighted average of the buffers in effect in the jurisdictions to which they have a credit exposure. RBC30 also explains how the CCyB is implemented by extending the size of the minimum buffer range established by the CCoB.
Any increases in the CCyB rate need to be pre-announced by up to 12 months to give banks time to meet the additional capital requirements before they take effect, while reductions in the buffer take effect immediately to help to reduce the risk of the supply of credit being constrained by regulatory capital requirements.4
| 4 | Banks outside of this jurisdiction with credit exposures to counterparties in this jurisdiction will also be subject to the increased buffer level after the pre-announcement period in respect of these exposures. However, in cases where the pre-announcement period is shorter than 12 months, the home authority of banks with exposures in this jurisdiction should seek to match the pre-announcement period where practical, or as soon as possible, subject to a maximum pre-announcement period of 12 months, before the new buffer level comes into effect. |
Authorities are expected to apply judgement in the setting of the buffer in their jurisdiction after using the best information available to gauge the build-up of system-wide risks. In addition, they are expected to calculate the internationally consistent credit-to-GDP gap measure that can serve as a common starting reference point for taking buffer decisions.
The common credit-to-GDP gap measure referenced in this chapter (also known as the ‘common reference guide’) is based on the aggregate private sector credit-to-GDP gap. The Guidance for national authorities operating the countercyclical capital buffer (December 2010) includes a technical annex which sets out why credit-to-GDP gap was selected as a measure over other variables and the methodology for calculating it.
Using credit-to-GDP gap as a reference measure does not always work well in all jurisdictions at all times. Judgement coupled with proper communications is thus an integral part of the regime. Rather than rely mechanistically on the measure, authorities are expected to apply judgement in setting the buffer in their jurisdiction after using the best information available to gauge the build-up of system-wide risks.
The use of judgement should be firmly anchored to a clear set of principles to promote sound decision‑making in the setting of the CCyB. By extension, communicating buffer decisions should help banks and other stakeholders understand the rationale underpinning the decisions and promote sound decision making by authorities responsible for operating the buffer. In this respect, the credit-to-GDP gap measure provides a useful common reference point against which the exercise of judgement can be understood.
Principle 1: Buffer decisions should be guided by the objectives to be achieved by the buffer, namely to protect the banking system against potential future losses when excess credit growth is associated with an increase in system-wide risks.
The CCyB is not meant to be used as an instrument to manage economic cycles or asset prices. Where appropriate, those may be best addressed through fiscal, monetary and other public policy actions. It is important that CCyB decisions be taken after an assessment of all relevant prevailing macroeconomic, financial and supervisory information, bearing in mind that the operation of the buffer may have implications for the conduct of monetary and fiscal policies. The timely sharing of information among relevant authorities is therefore necessary to ensure that the actions of all parties are fully informed and consistent with each other.
Principle 2: The credit-to-GDP gap measure is a useful common reference point in taking buffer decisions. It does not need to play a dominant role in the information used by authorities to take and explain buffer decisions. Authorities should explain the information used, and how it is taken into account in formulating buffer decisions.
Given close links between the credit-to-GDP gap and the objectives of the buffer, it is reasonable that it should be part of the information considered by the authorities. The internationally consistent credit-to-GDP measure should be considered as a useful starting point that authorities take into account in formulating and explaining buffer decisions. There is a need to disclose the internationally consistent credit‑to‑GDP gap on a regular basis.
Authorities in each jurisdiction are free to use any other variables and qualitative information that make sense to them for the purposes of assessing the sustainability of credit growth and the level of system-wide risks, as well as in taking and explaining buffer decisions. This includes constructing additional credit-to-GDP or other measures that are more closely aligned to the behaviour of their financial systems.
Principle 3: Assessments of the information contained in the credit-to-GDP measure and any other measures should be mindful of misleading signals.
In assessing a broad set of information to take CCyB decisions in both the build-up and release phases, authorities should look for evidence as to whether the inferences from the credit-to-GDP measure are consistent with those of other variables. Some examples of other variables that may be useful indicators in both phases include:
In using the credit-to-GDP gap it is important to consider whether the behaviour of the GDP denominator reflects the build-up of system-wide risks. For example, it may not be appropriate to adhere to the measure if credit-to-GDP gap has risen purely due to a cyclical slowdown or outright decline in GDP.
In addition, the calculated long-term trend of the credit-to-GDP ratio is a purely statistical measure that does not capture turning points well. Therefore, authorities should form their own judgements about the sustainable level of credit in the economy using the calculated long-term trend as a starting point in their analysis.
Other indicators can also convey misleading information. For example, a sharp rise in credit spreads may indicate a realisation of system-wide risks and suggest the release of the buffer. However, it would not be appropriate to rely purely on a rise in credit spreads to release the buffer as this indicator can be affected by other factors not related to fundamentals.
Principle 4: Promptly releasing the CCyB in times of stress can help to reduce the risk of the supply of credit being constrained by regulatory capital requirements.
Authorities can release the buffer gradually in situations where credit growth slows and system-wide risks recede in a benign fashion. In other situations, given that credit growth can be a lagging indicator of stress, promptly releasing the buffer may be required to reduce the risk of the supply of credit being constrained by regulatory capital requirements. In some cases, this can be done by timing and pacing the release of the buffer with the publication of banking system financial results so that the buffer is reduced in tandem with the banking sector’s use of capital to absorb losses or its need to absorb an increase in RWA. In other cases, more prompt action may be required based on relevant market indicators of financial stress to help ensure that the flow of credit in the economy is not jeopardised by uncertainty about when the buffer will be released.
When authorities decide to release the buffer, it is recommended that they indicate how long they expect the release to last. This is to help to reduce uncertainty about future bank capital requirements and give comfort to banks that capital released can be used to absorb losses and avoid constraining asset growth. Any such communications should be reviewed and updated on a regular basis so that any changes in the authorities’ outlook can be publicly disseminated on a timely basis.
Principle 5: The CCyB is an important instrument in a suite of macroprudential tools at the disposal of the authorities.
When excess aggregate credit growth is judged to be associated with a build-up of system-wide risks, authorities should deploy the CCyB, possibly in tandem with other macroprudential tools, to ensure the banking system has an additional buffer of capital to protect it against future potential losses. Alternative tools – such as loan-to-value limits, income gearing limits or sectoral capital buffers – may be deployed in situations where excess credit growth is concentrated in specific sectors but aggregate credit growth is judged not to be excessive or accompanied by increased system-wide risks.
As detailed in the Basel Framework jurisdictional reciprocity is applied to internationally active banks. Host authorities set the CCyB rate that applies to credit exposures held by banks operating in their jurisdiction. They are also expected to promptly inform their foreign counterparts of buffer decisions. Meanwhile, the home authorities are responsible for ensuring that the banks they supervise correctly calculate their CCyB requirements based on the geographic location of their exposures. Such reciprocity is necessary to ensure that the application of the CCyB in a given jurisdiction does not distort the level playing field between domestic banks and foreign banks. This reciprocity does not entail any transfer of power between jurisdictions; the power to set and enforce the regime ultimately rests with the home authority of the bank carrying the credit exposures.
Home authorities may require that the banks they supervise maintain higher buffers if they judge the host authorities’ CCyB level to be insufficient. However, home authorities should not implement a lower CCyB rate in respect of their banks’ credit exposures to the host jurisdiction. This helps to ensure that concerns about a competitive equity disadvantage to domestic banks (from foreign bank competition) do not discourage the implementation of the CCyB regime.
Without such a level playing field, foreign banks not subject to the host CCyB requirements may increase their lending in response to lower competition from domestic banks which could undermine the CCyB regime’s potential side benefit of reducing excessive credit.
In cases where banks have exposures to jurisdictions that do not operate a CCyB regime, home authorities are free to set their own CCyB add-ons for exposures to those jurisdictions. This can be done using credit and GDP data and other information on economic and financial conditions for those jurisdictions available from the BIS, IMF and other sources.
As with the minimum capital requirement and CCoB, host authorities have the right to demand that CCyB capital be held at the individual legal-entity level or consolidated level within their jurisdiction.
By explaining the information they use and how it is synthesised to arrive at buffer decisions, authorities should help build understanding and credibility in the CCyB decisions among the banks that are required to meet the buffer, authorities in other jurisdictions, and other stakeholders.
As macroeconomic, financial and prudential information are usually updated on at least a quarterly basis, it is sensible for authorities to review this information and take CCyB decisions on a quarterly or more frequent basis. Moreover, given the need to pre-announce prospective buffer requirements with a lead time of up to 12 months to give banks a reasonable amount of time to adjust their capital plans, taking decisions with this frequency helps to reduce the risk of the buffer not being in place before the credit cycle turns.
Once authorities have implemented their communication strategies, providing regular updates on their assessment of the macro-financial situation and the prospects for potential buffer actions is a useful way of preparing banks and their stakeholders for buffer decisions. In turn, that should help to smooth the adjustment of financial markets to those actions, as well as give banks as much time as possible to adjust their capital planning accordingly. But that does not mean that authorities should be expected to make quarterly statements on their buffer stance on an ongoing basis. Once authorities have implemented their communication strategies, it would be appropriate for them to comment on at least an annual basis using whichever communication vehicles are appropriate for their jurisdiction. Authorities should communicate more frequently to advise banks and other stakeholders promptly when there are significant changes to the authorities’ outlook for the prospect of changes to buffer settings.
All announced changes to the prevailing CCyB rate should be reported to the BIS on a timely basis. A list of prevailing CCyB rates, and pre-announced CCyB rates, are published on a dedicated page at the BIS website.5 This information aids banks calculate their specific buffer requirements.
The capital surplus created when the CCyB is released should be unfettered, ie there are no restrictions on distributions when the buffer is turned off. When the buffer is turned off, banks are more likely to use the released capital to absorb losses or protect themselves against the impact of problems elsewhere in the financial system. However, if banks did seek to distribute the released capital when the buffer was turned off, and such an action was considered to be imprudent by the supervisor given the prevailing circumstances, the authorities could prohibit these distributions in the context of their capital planning discussions with banks.
In some jurisdictions, Pillar 2 may need to adapt to accommodate the existence of the CCyB regime. Specifically, it makes sense for authorities to ensure that a bank’s Pillar 2 requirements do not require capital to be held for financial system-wide issues, if they are already captured by the CCyB when the latter is above zero. However, as Pillar 2 may capture additional risks that are not related to system-wide issues (eg concentration risk), capital meeting the CCyB should not be permitted to be simultaneously used to meet these non-system-wide elements of any Pillar 2 requirement.
Sectoral macroprudential tools are a useful complement to the existing macroprudential toolkit, when systemic risk is confined to specific credit segments.6 Historical episodes of financial crises show that imbalances in credit and asset markets are often confined to a specific market segment that can give rise to systemic risk. In addition, non-financial corporate and mortgage credit cycles are often not well synchronised, indicating the benefits for separate tools addressing these segments. In an environment of confined imbalances, targeted tools are:
Moreover, many sectoral tools exist only for some sectors, in particular the real estate segment. In this regard, the SCCyB may be a particularly convenient tool as it builds on the existing CCyB framework and can be applied to sectors other than real estate. Despite these advantages, several challenges associated with sectoral macroprudential tools remain, including potential spillovers to other credit segments, increased complexity of the framework and the need for an overall risk assessment identifying both broad-based and more targeted cyclical systemic risks to financial stability.
Since the SCCyB is a refinement of the CCyB, many elements of the CCyB framework can be adapted for its use at sectoral level, but important differences remain.
Principle 6: In taking buffer decisions, national authorities should be guided by the primary objective of the SCCyB, namely to ensure that the banking sector in aggregate has the capital on hand to help maintain the flow of credit in the economy without its solvency being questioned, when faced with losses related to the unwinding of sectoral cyclical imbalances.
Similar to the CCyB, the SCCyB’s primary objective is to enhance banks’ resilience to sectoral credit losses in cyclical downturns without their solvency being questioned, while simultaneously maintaining the flow of credit in the economy. Moreover, by affecting the relative capital charge of different credit segments, the SCCyB may help to contain the build-up of sectoral cyclical imbalances.
Principle 7: National authorities should define a small number of target segments. These segments should be: (i)potentially significant from a financial stability perspective; and (ii)prone to cyclical imbalances. If jurisdictional reciprocity is deemed important, then to facilitate voluntary reciprocation the target segment should be defined in a way that ensures its replicability by jurisdictions other than the home jurisdiction.
In line with the SCCyB’s primary objective, an effective operationalisation of the SCCyB requires that the SCCyB targets only those credit segments that are of systemic importance from a financial stability perspective. In this regard, a potential target segment should be significant relative to the total size of the national banking system, whereby size may refer to volume, RWAs, riskiness or any other reasonable metric. To not pre-empt the application of the CCyB, the defined target segments should not be framed too broadly.
In addition, the credit segment should be prone to cyclical imbalances. Total real estate lending and its two sub-segments, residential (eg mortgage) and commercial real estate, as well as non-real estate related private non-financial corporate and household (eg consumer) lending meet this criterion for most countries, although some countries may wish to target other segments.
Given that the SCCyB is not part of the Basel Framework, the recognition of buffer rates is based on voluntary reciprocity arrangements between jurisdictions. The authority setting the SCCyB requirement could initiate a request for such a reciprocity agreement by other jurisdictions if deemed important. Importantly, any reciprocity arrangement does not entail any transfer of power between jurisdictions; the power to set and enforce the SCCyB regime will ultimately rest with the home authority of the bank carrying the credit exposures.
Principle 8: Depending on the situation, national authorities may wish to either activate the SCCyB or the CCyB, or to activate both buffers simultaneously. An activation of the SCCyB instead of the CCyB should be based on an assessment demonstrating that imbalances are confined to a specific credit segment. When national authorities consider switching between the SCCyB and the CCyB and vice versa, a smooth transition should be ensured. This may include allowing both buffers to be activated simultaneously, in which case national authorities should ensure that the adding up of buffer rates does not result in double counting of risk.
The SCCyB and the CCyB can be seen either as substitutes or as complements, depending on the situation. The activation of a SCCyB instead of a CCyB is particularly appealing when confined imbalances are combined with low economic growth, high uncertainty about future economic developments or subdued credit growth in other credit segments. In such an economic environment, the advantages of targeted tools, namely their effectiveness, efficiency and ease of communication become particularly relevant.
When deciding to activate a SCCyB instead of the CCyB, national authorities should also take into account the possible role of spillovers to other credit segments. If macroprudential policy targets a specific credit segment, activities may migrate to other segments: this could be positive if risks are better allocated, but it could also mean that imbalances are propelled elsewhere in the system (imbalance spillovers). Another challenge relates to potential loss spillovers to untargeted segments. Even without imbalance spillovers the unwinding of sectoral imbalances, when large enough, can affect untargeted sectors in terms of generating additional losses. When there are signs of significant imbalance spillovers or a high probability of loss spillovers, national authorities should consider whether the SCCyB provides sufficient resilience against imbalances in this sector and consider giving preference to activating the CCyB.
Authorities’ view on which buffer is the preferred tool may change over time, based on national authorities’ overall risk assessment. National authorities may consider: (i) switching between the SCCyB and the CCyB, or (ii) activating both a SCCyB and CCyB at the same time. The latter may for example be appealing when there are signs that sectoral imbalances are slowly spreading to other segments. Regarding the transition from using one buffer to using the other buffer, different options exist. Ideally, the two buffers should be treated as additive complements. A reconciliation mechanism can ensure that the adding up does not result in risks being double counted.
In certain situations it might also be preferable to activate two SCCyBs at the same time. For example, considering a situation in which imbalances are confined to the real estate segment, with imbalances in the commercial real estate segment being considerably higher than in the residential real estate segment, national authorities may want to simultaneously activate two SCCyBs. This may still prove more effective than activating either a single SCCyB on a broader segment category (ie total real estate) or the broad‑based CCyB. When deciding to activate more than one SCCyB across different credit segments rather than for two sub-segments, national authorities should provide reasoning, also with a view to possible spillovers to other credit segments. National authorities should be aware that activating more than two SCCyBs at a given time, instead of the CCyB, will be a considerable communication and accountability challenge.
Principle 9: National authorities should identify a transparent set of indicators that have the ability to act as early warning indicators for sectoral imbalances in their home countries and are associated with an increase in system-wide risks in the financial system.
Mainly due to limited internationally consistent data available at the sectoral level, the credit-to-GDP measure adopted for the CCyB may not be a sensible option for a SCCyB framework. In taking SCCyB decisions, national authorities should identify a broader set of indicators on which a SCCyB framework could be built. In this regard, national discretion based on the best available information may play a greater role compared to the CCyB.
Following the relevant empirical literature and BIS guidance provided in context of the CCyB, meaningful indicators can broadly, but not exclusively, be categorised as credit volume indicators (eg credit gap and credit growth measures), asset price indicators (eg price to income or price to rent measures) and risk indicators (eg affordability, credit conditions and credit-spread measures).
Principle 10: National authorities should ensure an adequate calibration of the SCCyB so that it can achieve its objectives.
The SCCyB may have to be set at a level higher than 2.5% of sectoral RWA at the peak of the sectoral credit cycle to ensure that the objectives are met.7 Levels above 2.5% may appear large when compared to the 2.5% calibration defined in the context of the CCyB (reciprocity cap), but SCCyB buffer levels are expressed in terms of sectoral RWA and hence, they are much smaller when expressed as a fraction of total RWAs.8 The situation may, however, differ across jurisdictions and segments targeted by the SCCyB.
| 7 | Among others, this follows an assessment of historical losses during severe sectoral crisis periods and projected losses under severe stress scenarios. |
| 8 | This can be illustrated by a simple example: Assuming a bank with 50 mortgage RWA in country A and 50 mortgage RWA in country B and total RWA of 500. The share of total mortgage RWA in total RWA is 20%. If country A activates a SCCyB and sets its level to 10% the requirement would correspond to 10%*0.2*0.5= 1% of total RWA. |
Principle 11: National authorities’ decision to promptly release the SCCyB when sectoral cyclical risks materialise should allow banks to absorb losses and maintain lending to the real economy. When sectoral cyclical risks do not materialise but are judged to recede more slowly, a gradual release of the buffer may be more appropriate.
While a gradual release of the SCCyB could, in principle, be guided by the same indicator set as for the build-up of the SCCyB, a prompt release likely requires the monitoring of higher-frequency information (eg financial market-based indicators). In the prompt release scenario, judgement is likely to play a more important role, as an indicator-based prompt release may be limited by availability of data both in the cross-section as well as in the time-series (eg frequency) dimension. In their overall risk assessment, national authorities should consider the implications of any decision to release the CCyB, SCCyB or both. A release of the SCCyB could also be considered when the sectoral risk declines in relative terms to overall cyclical risk in the economy.
Principle 12: National authorities should integrate their decision-making on the SCCyB into their strategy for communicating their decisions on the CCyB. As part of this strategy, they should also establish a transparent communication on their assessment of broad-based versus more targeted cyclical systemic risks in the financial system to key stakeholders and the public (overall risk assessment).
SCCyB decisions rely on national authorities’ overall risk assessment of broad-based versus sectoral cyclical systemic risks to the financial system, including national authorities’ assessment on possible spillovers to other credit segments. It is important to integrate decisions on the SCCyB into the communication process established for the CCyB, and to also explain to relevant stakeholders and the public the reasoning for: (i) using the SCCyB in isolation; (ii) using other instruments instead of the SCCyB; and (iii) combining the SCCyB with other instruments. In addition, a timely communication of buffer decisions is important to ensure that national authorities in other jurisdictions can prepare for the voluntary reciprocation of the SCCyB.
BCBS Member jurisdictions which have implemented a SCCyB at national level or plan to apply such a tool in the future may consider establishing a mechanism for coordinating with other BCBS Member jurisdictions.
An important design characteristic of the CCyB is that once activated, the additional capital requirements are imposed on total RWA. Thus, the additional capital requirements depend only on a bank’s total exposure. Neither the size of the credit exposure relative to total exposure, nor the distribution of the credit exposure across the different credit segments, plays a role.9 This ensures that the additional resilience built up within the system through the CCyB’s activation is directly related to the total exposure, accounting for the fact that the bursting of a bubble may lead to a general downturn, thereby also affecting other credit and non-credit exposures. At the same time, this leads to a situation where banks with very different shares of credit exposures in total exposures are subject to identical CCyB requirements. By comparison, the SCCyB is expressed in terms of sectoral RWA, and the resulting additional capital requirements are thus much smaller when expressed as a fraction of total RWAs.
By imposing the additional capital requirement on total RWA the CCyB does not affect the relative capital charge and therefore pricing of different segments of loans. Given its targeted nature, the SCCyB is more likely to help with taming the procyclicality10 of sectoral credit compared to the CCyB.
| 10 | A term which is generally used to refer to the mutually reinforcing (“positive feedback”) mechanisms through which the financial system can amplify business fluctuations and possibly cause or exacerbate financial instability. |
Table 1 below illustrates some potential examples assuming a framework that would allow both the CCyB and the SCCyB to be activated simultaneously.
| Table 1: Examples for interaction of a SCCyB with the CCyB | ||
| Single sector | Broader economy | Potential use of SCCyB and CCyB |
| Exuberant. Even in a downturn, losses are likely to be contained to this sector. | Normal. | - SCCyB set at X%, CCyB at 0. |
| Exuberant. In a downturn, losses may spread to other sectors causing wider-spread disruption. | Low growth environment. High uncertainty about future economic developments. | - SCCyB set at X%, CCyB at 0. |
| Exuberant. In a downturn, losses may spread to other sectors causing wider-spread disruption. | Normal. | - SCCyB set at X%. - CCyB at small level: Y%. |
| Exuberant. In a downturn, losses are likely to spread to other sectors causing wider-spread disruption. | Strong growth environment. Signs that imbalances in the initial sector have spilled over to other segments. | - SCCyB set at X%, CCyB at medium level Z%. |
| Exuberant. In a downturn, losses are likely to spread to other sectors causing wider-spread disruption. | Booming economy. Imbalances in other segments have built up to a level that are equally (or almost) problematic as in the initial sector. | - SCCyB set at 0%, CCyB at elevated level W%. |
There are several possible ways for a SCCyB to interact with the CCyB if authorities wish to switch from using one buffer to also, or exclusively, using the other buffer. However, ideally, any interaction between the two tools would respect the following principles:
The Guiding principles for the operationalisation of a sectoral countercyclical capital buffer (November 2019) includes a detailed worked example of how the CCyB and SCCyB can work together as additive complements.
This module describes expectations to combat money laundering and terrorist financing.
This module describes expectations and practices relating to capital adequacy.
This module describes expectations for corporate governance.
This module describes expectations for credit risk and counterparty credit risk management.
This module describes expectations for external audit and sets out references related to public disclosure.
This module describes expectations for banks’ internal audit and compliance functions.
This module describes expectations for liquidity risk management.
This module sets out references related to market risk and interest rate risk.
This module describes expectations for the management of operational risk and operational resilience.
This module describes expectations for the management of problem assets and expected credit losses.
This module describes the application of proportionality in prudential regulation and supervision.
This module describes expectations for risk management.
This module describes the nature and application of prudential supervision.