Countercyclical Capital Buffer
The countercyclical capital buffer is a macroprudential tool requiring banks to build extra capital during periods of excessive credit growth.
Meaning in Practice
Authorities activate the buffer when systemic risks are rising, particularly during credit booms. Banks must accumulate additional capital that can later be released in downturns. This mechanism aims to moderate the financial cycle.
Why It Matters
The buffer reduces the build-up of systemic risk in good times. It strengthens banks’ resilience and supports lending capacity during recessions. This contributes to financial stability.
Market Impact
Activation of the buffer may reduce short-term lending growth and impact profitability. However, markets often view it as a signal of prudent oversight. Release of the buffer during downturns can support credit supply.
Example
A national regulator increases the countercyclical buffer rate to 1% during a housing market boom to limit excessive mortgage lending.