The countercyclical capital buffer
In reaction to the Basel III regulatory framework, CRD IV introduced an important macroprudential instrument into EU regulatory practice: a countercyclical capital buffer. This instrument is designed to increase the resilience of the financial system to risks associated with the behaviour of the banking sector over the financial cycle, and especially with large fluctuations in lending, which amplify cyclical swings in economic activity. If a delegated macroprudential policy authority concludes that the cyclical part of systemic risk is increasing, it should ensure that capital accumulates in the banking sector through the creation of buffers that increase its resilience. Conversely, in a period of cyclical decline accompanied by elevated financial stress and rising credit losses, the capital buffer should be released and used to cover losses. This coverage should prevent transmission of further shocks from the financial sector to the real economy while maintaining credit supply from banks. The creation of the buffer can to some extent help curb rapid growth in loans, especially those with a riskier profile reflected in higher capital requirements. However, this is only a possible side-effect, not the primary purpose of the buffer.
The CNB sets the countercyclical buffer rate on a quarterly basis. It was announced for the first time on 1 October 2014. It becomes legally binding upon the issuance of a provision of a general nature. When the rate is increased or left unchanged, the institutions concerned are usually notified one year in advance of the rate taking effect. The CNB can shorten this period in exceptional cases (justified by the existence of high systemic risk). If the rate is reduced, the new rate can take effect immediately. The CNB stands ready to sharply reduce the rate to zero (i.e. release the buffer created for domestic exposures) in the event of, for example, adverse shocks giving rise to a risk of disruptions to smooth lending to the economy. The CNB can also release the buffer gradually by cutting the rate if the financial cycle enters a downturn and the risk of excessive credit growth decreases. For a more detail on CNB approach to the countercyclical capital buffer in the Czech Republic (see The CNB’s approach to setting the countercyclical capital buffer (pdf, 495 kB)).
Countercyclical capital buffer rate
- Current rate: 0.50%
- Rate applied from 1 July 2022: 1.00%
Provision of a general nature on setting the countercyclical capital buffer rate
- Provision of a general nature II/2021
of 27 May 2021 on setting the countercyclical capital buffer rate for the Czech Republic No. II/2021
- Archive of provisions of general nature
Data for the calculation of parameters for setting the countercyclical capital buffer rate
Material third countries: Russia and Turkey.