What is Counter Cyclical Buffer?
While left to the discretion of individual country supervisors, Basel III recommends that banks have a capital buffer to protect against the cyclicality of bank earnings, called the countercyclical buffer (CCyB). The countercyclical buffer can range from 0% to 2.5% of RWAs. Like the capital conservation buffer, it must be met with Tier 1 equity capital. The buffer will be phased between January 1, 2016, and January 1, 2019. For countries that require the countercyclical buffer, dividend restrictions may apply. The CCyB is complicated for international banks because the requirements may differ across countries.
Why is Counter Cyclical Buffer important?
The countercyclical capital buffer (CCyB) is designed to shield the banking sector from periods of excessive aggregate credit expansion, which have been linked to the accumulation of system-wide hazards in the past.