New research analyses impacts of countercyclical capital buffer
13 April 2016
Press Release
- The countercyclical capital buffer (CCB) is a new Europe-wide macro-prudential instrument.
- The Central Bank sets the countercyclical capital buffer rate for Ireland on a quarterly basis.
- Central Bank analysis shows indicators would have provided signal of potential excessive credit growth and rising systemic risk in Ireland before 2008.
The Central Bank has published a new Economic Letter (PDF 308.98KB) providing an overview of the countercyclical capital buffer- one of a range of macro-prudential tools now at the disposal of financial stability authorities. The CCB came into effect across Europe on January 1 2016. The aim of the CCB is to protect the banking system against potential losses arising from excessive credit growth, which contributes to the long term resilience of the financial system. The CCB may make the provision of bank credit more stable as increased capital requirements may constrain lending, preventing credit fuelled growth in an economic upturn. The additional capital buffers may also reduce the incentives of institutions to curtail lending during a downturn. Quantitative indicators relating to credit developments, real estate prices and external imbalances, among others, are recommended inputs into the rate setting process. Policymakers ultimately decide the appropriate rate.
The Central Bank, in conjunction with the ECB, is the responsible authority regarding the CCB in Ireland. The CCB rate, as set by the Central Bank, is currently 0%. This rate will be reviewed quarterly.
The Letter provides an overview of the countercyclical capital buffer and European Systemic Risk Board (ESRB) guidelines within which the Central Bank will set the CCB rate for Irish exposures. Quantitative indicators, in line with those recommended by the ESRB, are presented in an Irish context showing their evolution over time. The Letter also outlines some of the challenges that arise in the estimation and interpretation of these quantitative indicators thereby highlighting the key role that judgement will play in setting the CCB rate.
Notes
The CCB rate will be set on a quarterly basis and ordinarily will range from between 0 to 2.5 per cent of total risk exposures, but can be set at a higher rate if necessary. Once the CCB rate is set or increased above 0 per cent, banks will generally have one year to meet the increased capital requirement. When the CCB rate is reduced, the lower capital requirement will be immediately applicable. The CCB rate which applies to individual institutions will be the weighted average of the CCB rates in the countries where they operate.