Basel Committee publishes range of practices report on implementing a positive neutral countercyclical capital buffer
The Basel Committee on Banking Supervision (BCBS) published today a report on the range of practices used to implement a positive neutral countercyclical capital buffer (CCyB). The report provides an overview of the approaches taken by jurisdictions that have implemented a positive neutral CCyB, as well as those that are considering doing so.
Background
The CCyB is a macroprudential tool that can be used to mitigate systemic risk by adjusting bank capital requirements in response to changing economic conditions. A positive neutral CCyB is a buffer that is applied when the credit cycle is judged to be above normal. Such a buffer aims to dampen the procyclical effects of lending, such as those resulting from overly optimistic expectations about future growth, which can exacerbate financial imbalances and increase the risk of a financial crisis.
The BCBS has recommended that jurisdictions implement a CCyB, including a positive neutral component, as part of their macroprudential framework. However, the BCBS recognises that there is no one-size-fits-all approach to implementing a positive neutral CCyB, and that jurisdictions should tailor their approach to their specific circumstances.
Range of practices
The BCBS report identifies a range of practices that jurisdictions have used to implement a positive neutral CCyB. These practices include:
- The size of the buffer: The size of the positive neutral CCyB can vary depending on the jurisdiction’s assessment of the risks to financial stability. Some jurisdictions have implemented a relatively small buffer, while others have implemented a larger buffer.
- The triggers for activating the buffer: The positive neutral CCyB can be activated based on a variety of triggers, such as the level of credit growth, the ratio of household debt to income, or the level of housing prices.
- The timing of the buffer: The timing of the buffer can also vary, with some jurisdictions implementing it immediately, while others have phased it in over time.
- The composition of the buffer: The positive neutral CCyB can be composed of a variety of capital instruments, such as common equity, Tier 1 capital, or total capital.
Considerations for implementation
The BCBS report also provides a number of considerations for jurisdictions that are considering implementing a positive neutral CCyB. These considerations include:
- The need for a clear and transparent framework: The framework for implementing a positive neutral CCyB should be clear and transparent, so that banks and markets can understand how the buffer will be applied.
- The importance of data: The implementation of a positive neutral CCyB requires access to high-quality data on the financial sector and the economy.
- The need for coordination: The implementation of a positive neutral CCyB should be coordinated with other macroprudential tools, such as loan-to-value ratios and debt-to-income ratios.
- The importance of monitoring and evaluation: The implementation of a positive neutral CCyB should be monitored and evaluated on an ongoing basis to ensure that it is effective and does not have unintended consequences.
Conclusion
The BCBS report on the range of practices used to implement a positive neutral CCyB provides valuable insights for jurisdictions that are considering implementing this tool. The report highlights the importance of tailoring the implementation of a positive neutral CCyB to the specific circumstances of each jurisdiction, and the need for a clear and transparent framework, high-quality data, coordination, and ongoing monitoring and evaluation.
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