The capital conservation buffer
The capital conservation buffer is one of the new prudential instruments serving to preserve a bank’s capital. It is a capital buffer equal to 2.5% of the total risk exposure amount and is made up of the best-quality capital (Common Equity Tier 1). Under the Act on Banks, all banks are obliged to maintain the capital conservation buffer and the rate will not change over time. This buffer is often referred to as a macroprudential tool. However, it is in fact a redefined element of the traditional microprudential capital requirements, even though it is also to some extent macroprudential in effect. When the relevant European regulation was implemented into Czech law, the option of immediate introduction of the capital conservation buffer was chosen instead of gradual implementation. Banks are thus required to comply with it in the full amount of 2.5% as from 2014.