Countercyclical capital buffer proposal

The Basel Committee on Banking Supervision has issued for consultation a proposal for a countercyclical capital buffer regime.

The Committee welcomes comments on all aspects of this proposal by Friday 10 September 2010. Comments should be submitted by post (Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland) or email (baselcommittee@bis.org). All comments will be published on the Bank for International Settlements' website unless a commenter specifically requests anonymity or confidential treatment.

Introduction

The agreement of the Group of Central Bank Governors and Heads of Supervision, set out in its 7 September 2009 press release, included a commitment to introduce a framework for countercyclical capital buffers above the minimum requirement. Subsequently, the Basel Committee agreed that a building block approach should be adopted to organise the work on procyclicality. The aim of this approach was to align the development of tools to address procyclicality according to a specific set of objectives. The four key objectives identified by the Committee were set out as follows in the December 2009 Consultative Document Strengthening the resilience of the banking sector:

1. dampen any excess cyclicality of the minimum capital requirement;
2. promote more forward looking provisions;
3. conserve capital to build buffers at individual banks and the banking sector that can be used in stress; and
4. achieve the broader macroprudential goal of protecting the banking sector from periods of excess credit growth

The December 2009 Consultative Document included a proposal for a capital conservation buffer to address the third objective above and set out some potential elements of a regime to address the fourth objective. The Macro Variables Task Force (MVTF) was formed to further develop a proposal to address the fourth objective with the goal of providing a fully detailed proposal for review by the Basel Committee at its July 2010 meeting. The proposal takes into consideration the formal feedback on a summary of the broad concept of a countercyclical buffer contained in the December Consultative Document.

This consultative document is structured as follows:

• Section 1 describes the primary objective of the proposed buffer and presents a short overview of how it would operate in practice.
• Section 2 sets out a more detailed description of certain key elements of the proposal.
• The annexes discuss how the proposed buffer can be integrated with the capital conservation buffer, describe how the credit-to-GDP guide should be calculated and provide the supporting empirical evidence used to develop the proposal.