The Basel Committee on Banking Supervision’s (BCBS) Basel III standard includes a countercyclical capital buffer (CCyB) regime. National authorities can implement a CCyB requirement to ensure that the banking system has an additional buffer of capital to protect against potential future losses related to downturns in the credit cycle.
Basel III
The BCBS (2010a) common set of standards known as “Basel III” introduced a countercyclical capital buffer (CCyB) regime, which was phased in from 1 January 2016 and became fully effective on 1 January 2019. National authorities can put in place a countercyclical buffer requirement to ensure the banking system has an additional buffer of capital to protect it against potential future losses related to downward phases of credit cycles and to help maintain the flow of credit in the economy without the banking sector’s solvency being questioned.
Sectoral countercyclical capital buffer
The sectoral countercyclical capital buffer (SCCyB) may be a useful complement to both the Basel III CCyB and existing targeted instruments in the macroprudential toolkit. While a bank’s additional capital requirements following an activation of the CCyB depend on its total 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).
Sectoral macroprudential tools
Analyses carried out by the Basel Committee’s standard-setting and research-based working groups consider that sectoral macroprudential tools are a useful complement to the existing macroprudential toolkit, when systemic risk is confined to specific credit segments. Historical episodes of financial crises show that imbalances on 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:
- more effective as they help build up resilience early and in a targeted manner;
- more efficient in terms of minimising unintended side effects, ie they have a better cost-effectiveness ratio; and
- easier to execute than broader-based tools, ie they could help to reduce potential inaction bias.
Moreover, many sectoral tools exist only for some sectors, in particular the real estate segment. In this regard, the SCCyB appears as 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, an 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.
Willing to implement a SCCyB
The guiding principles aims at supporting 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 standards, these principles are only relevant for jurisdictions that voluntarily choose to implement a SCCyB at a national level.
Source: https://www.bis.org
