13 September 2010

BCBS issues consultative document on proposal for countercyclical capital buffer

The agreement of the Group of Central Bank Governors and Heads of Supervision in September 2009  included a commitment to introduce a framework for countercyclical capital buffers above the minimum requirement. Subsequently, the Basel Committee agreed that a building block approach should be adopted to organise the work on procyclicality along four specific set of objectives:

- dampen any excess cyclicality of the minimum capital requirement;

- promote more forward looking provisions;

- conserve capital to build buffers at individual banks and the banking sector that can be
  used in stress; and

- achieve the broader macroprudential goal of protecting the banking sector from periods
  of excess credit growth.

The Macro Variables Task Force (MVTF) was formed to further develop a proposal to address the fourth objective with the goal of providing a fully detailed proposal for review by the Basel Committee at its July 2010 meeting.

  This proposal takes into consideration the formal feedback on a summary of the broad concept of a countercyclical buffer and is designed to ensure that banking sector capital requirements take into consideration the macro-financial environment in which banks operate, ensuring that the banking system  has a buffer of capital to protect it against future potential losses. The proposal focuses on aggregate credit growth, and will be deployed only when excess aggregate credit growth is judged to be associated with a build up of system wide risks which can be as infrequent as every ten (10) to twenty (20) years.
 
The document also discusses how the proposed buffer can be integrated with the capital conservation buffer,  how the credit-to-GDP guide should be calculated and provides the supporting empirical evidence used to develop the proposal.

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