Capital Conservation Buffer
The capital conservation buffer is an additional layer of capital banks must hold above minimum requirements to absorb losses during stress.
Meaning in Practice
It requires banks to maintain extra Common Equity Tier 1 capital beyond the minimum ratio. If the buffer falls below required levels, dividend and bonus distributions are restricted.
Why It Matters
The buffer strengthens bank resilience and reduces procyclical behavior during downturns. It ensures institutions build capital in good times to absorb future losses.
Market Impact
Restrictions on payouts can affect investor returns and share prices. However, stronger capital buffers typically lower systemic risk and funding costs.
Example
During economic expansion, a bank retains earnings to maintain its capital conservation buffer above regulatory thresholds.