Newsletter on positive cycle-neutral countercyclical capital buffer rates

This version

BCBS  | 
05 October 2022
Status:  Current


The Covid-19 pandemic and recent geopolitical events have highlighted the unpredictable nature of external shocks that can impact the banking sector. The initial elements of the Basel III reforms have played a central role in ensuring that the banking system has thus far remained operationally and financially resilient during these events and has continued to lend to creditworthy households and businesses. The Basel Committee remains committed to the full, timely and consistent implementation of the remaining elements of Basel III, as finalised in 2017.

The regulatory capital buffers introduced through the initial phase of the Basel III reforms, together with bank management buffers, are key to maintaining banking sector resilience. These buffers enable banks to bear the impact of unexpected losses and continue to lend without breaching minimum capital requirements.

The Committee's recent evaluation report found some indications of a positive relationship between lending and the capital headroom of banks (ie the surplus of a bank's capital resources above all minimum regulatory requirements and regulatory buffers). Given the evaluation findings, the longer-term impacts of the pandemic, ongoing geopolitical events and the potential for new risks to emerge, the Committee wishes to stress the importance of the prudent build-up and use of buffers at banks to smooth the impact of internal and external shocks. To facilitate this, some jurisdictions have chosen to implement positive cycle-neutral countercyclical capital buffer (CCyB) rates.

Positive cycle-neutral CCyB rates

The CCyB aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate. The CCyB can be raised by authorities in response to excess aggregate credit growth and then released during downturns. It was designed with the primary objective of increasing the resilience of the banking sector in response to periods of excess aggregate credit growth, which have often been associated with the build-up of system-wide risk.

While the Basel standard prescribes various aspects of the CCyB framework, a number of elements remain under the discretion of national authorities and an increasing number of jurisdictions have chosen to implement positive cycle-neutral CCyB rates. Under this approach, authorities aim for a positive CCyB rate when risks are judged to be neither subdued nor elevated. As is the case with CCyB activation and deactivation, authorities can employ a broad range of indicators, including the credit-to-GDP gap and other financial and macroeconomic metrics, to determine the cycle-neutral level of the CCyB.

Authorities that have introduced positive cycle-neutral CCyB rates have found it helpful for banks in their jurisdictions to have buffers of capital in place that can be released in the event of sudden shocks, including those unrelated to the credit cycle, such as the impact of the Covid-19 pandemic. This approach 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.

The Committee supports and sees benefits in the ability of authorities to set a positive cycle-neutral CCyB rate on a voluntary basis. Authorities that implement such an approach should maintain compliance with the existing Basel standards, including the agreed calibration of the minimum requirements and other regulatory buffers. The Committee also notes that circumstances vary across jurisdictions, including the macroeconomic conditions and the range of macroprudential tools available, for example sectoral buffers, and their use to generate sufficient resources for banks to absorb unpredictable shocks. As a result, not all authorities consider a positive cycle-neutral CCyB rate to be appropriate in their jurisdictions.

The Committee will continue to monitor the effectiveness of the capital buffer framework together with the other elements of Basel III reforms.