1

CountercyclicalCapitalBuffers(Limiting
Procyclicality)
TheCountercyclicalcapitalbuffer(CCB)aimstoachievethebroadermacro
prudentialgoalofprotectingthebankingsectorfromperiodsofexcess
aggregatecreditgrowththathaveoftenbeenassociatedwiththebuildupof
systemwiderisk.
Inaddressingthisprimaryaim,theCCBregimemayalsohelptoleanagainst
thebuildupphaseofthecycleinthefirstplace,byraisingthecostofcreditand
thusdampeningitsdemand.
Jurisdictionswillberequiredtomonitorcreditgrowthinrelationtomeasures
suchasGDPandassesswhethergrowthisexcessiveandleadingtothebuildup
ofsystemwiderisk.BasedonthisassessmentaCCBrequirement,rangingfrom
0to2.5%ofriskweightedassets,maybeputinplace.
1. WhyitMatters
1.1 Procyclicality(amplificationoftheeffectsofthebusinesscycle)inbanking
wassaidtohavehelpedexacerbatetheimpactofbankingcrisis,andwhilstit
isinherentandcannotbeeliminated,thecountercyclicalcapitalbufferaims
toreduceitsamplificationthroughthebankingsector,inparticularthat
causedbyexcessivecreditgrowth.
1.2 TheBaselCommitteeonBankingSupervision(BCBS)seestheCCBas
resultinginthefollowingbenefits:

i) Protectingthebankingsectorfromlossesresultingfromperiodsof
excesscreditgrowthfollowedbyperiodsofstress;

ii) Helpingensurecreditremainsavailableduringperiodsofstress;

iii) Duringthebuildupphase,ascreditisbeinggrantedatarapidpace,
itmaycausethecostofcredittoincrease,actingasabrakeonbank
lending.

1.3 ThecommonreferencepointputforwardbytheBCBSfortakingCCB
decisionsisthecredittoGDPguide.ItisimportanttonotethattheBCBShas
caveatswithrespecttoitsuse,notleastthatthecommonreferencepoint
couldgivemisleadingsignalsifusedasastandalonemeasure.
1.4 Asaresult,theBCBSproposesupervisoryjudgmentisalsoexercisedwhen
CCBdecisionsaremade.Thekeyrolegiventojudgmentbyrelevantnational
authorities,thedesignationofwhichwillbelefttoeachjurisdiction,could
howeverresultinanunlevelplayingfield.
1.5 ItisalsoimportantthattheCCBisseenandusednotinisolationbutwith
regardstothefullpotentialsuiteofmacroprudentialtools.

2. SummaryofAFMEPosition
2.1 Thecountercyclicalbufferisoneofarangeofprudentialinitiativesdesigned
tolimitprocyclicalityand,whilstAFMEsupportstheprincipleofalesspro
cyclicalframework,wedohaveanumberofsignificantconcernsrelatingto
itsoperationanditsinteractionwithothercountercyclicalmeasuresand
thewiderBaselIIIandprudentialframework.
2.2 WesuggestaPillar2approach,sothatamoretailoredregulatoryresponse
cantakeplace,withsupervisorycollegesassistingwithconsistencyof
implementation.
2.3 Failingthat,asimplifiedversionwouldhelpreducetheneedforcostly
systemsenhancements.Thiscouldbebasedonbankingbookexposures
onlyandinparticularshouldtakeaccountofbanksexistingcountryrisk
methodologies.
3. RegulatoryContext
3.1 Sincethebeginningofthefinancialcrisisprocyclicalitywasregardedbythe
G20asakeyissuetobeaddressed.Thefinancialcrisishasillustratedits
disruptiveeffectsandtherewasbroadconsensusthatthereisarolefor
prudentialinstrumentstosmooththeeffectsofthecreditcycle.TheBCBSs
rationalefortheintroductionofacountercyclicalcapitalbufferaspartofthe
BaselIIIpackagefocusedontheneedforthebankingsectortobuildupits
capitaldefencesinperiodswhencredithasgrowntoexcessivelevels.
4. OverviewoftheCountercyclicalCapitalBuffer
a GeneralPoints
4.1 Countercyclicalbufferrequirementwillvarybetweenzeroand2.5%ofrisk
weightedassets,dependingonthejudgmentofindividualjurisdictionsasto
theextentofthebuildupofsystemwideriskinagivenjurisdiction.
However,whilsttheinternationalreciprocityprovisionssetoutinBaselIII
setthemaximumcountercyclicalbufferas2.5%,nationalauthoritiescan
implementabufferinexcessof2.5%forbanksintheirjurisdiction,if
deemedappropriate.TheCCBrequirementwillbereleasedwhensystem
wideriskcrystallisesordissipates.
4.2 ThedecisiontoraisetheleveloftheCCBwillbepreannouncedbyupto12
months.DecisionstodecreasetheCCBlevelwilltakeeffectimmediately.
Bothpreannouncedandactualbuffersinplacewillbemadepublic.
4.3 TheCCBisarticulatedasanextensionofabankscapitalconservationbuffer,
andbankswillbesubjecttorestrictionsondistributionsiftheydonotmeet
therequirement.
4.4 BankswillberequiredtocalculateandpubliclydisclosetheirCCB
requirementswithatleastthesamefrequencyastheirminimumcapital
requirements.InadditiontodisclosingtheirCCBrequirements,bankswill
alsohavetodisclosethegeographicbreakdownoftheirprivatesectorcredit
exposuresusedinthecalculationoftheCCBrequirement.

b NationalCountercyclicalBufferRequirements
4.5 Eachjurisdictionwillidentifyanauthoritywiththeresponsibilitytomake
decisionsonthesizeoftheCCBanditsimplementation/release.
4.6 Relevantnationalauthoritieswillmonitorcreditgrowthandother
indicatorsthatmaysignalabuildupofsystemwideriskandmake
assessmentsofwhethercreditgrowthisexcessiveandisleadingtothe
buildupofsystemwiderisk.Basedonthisassessmenttheywillputinplace
aCCBrequirement.
4.7 BCBSissuedGuidancefornationalauthoritiesoperatingthecountercyclical
buffer,whichoutlinestheprinciplesthatrelevantnationalauthoritieshave
agreedtofollowinmakingCCBdecisions.
4.8 Toassisttherelevantnationalbankingregulatorsineachjurisdictionin
makingbufferdecisions,theBCBShasoutlineinitsGuidancedocumenta
methodologytoserveasacommonstartingreferencepoint.The
methodologytransformstheaggregateprivatesectorcredit/GDPgapintoa
suggestedbufferaddon,withazeroguideaddonwhencredit/GDPisnear
orbelowitslongtermtrendandapositiveguideaddonwhencredit/GDP
exceedsitslongtermtrendbyanamountwhichsuggeststherecouldbe
excesscreditgrowth.
4.9 BCBSdoesnothoweverintendforthejurisdictionstorelymechanistically
onthecommonreferenceguide,butratherforthemtoapplyjudgmentin
settingofthebufferafterusingalltheavailableinformation.Theuseof
judgmentneedstobefirmlyanchoredtoasetofprinciplesalsooutlinedin
theGuidance:
Principle1:(Objectives):Bufferdecisionsshouldbeguidedbythe
objectivestobeachievedbythebuffer
Principle2:(Commonreferenceguide):Thecredit/GDPguideisa
usefulcommonreferencepointintakingbufferdecisionsbutdoes
notneedtoplayadominantroleintheinformationusedby
authoritiestotakeandexplainbufferdecisions
Principle3:(Riskofmisleadingsignals):Assessmentsofthe
informationcontainedinthecredit/GDPguideandanyotherguides
shouldbemindfulofthebehaviourofthefactorsthatcanleadthem
togivemisleadingsignals
Principle4:(Promptrelease)Promptlyreleasingthebufferintimes
ofstresscanhelptoreducetheriskofthesupplyofcreditbeing
constrainedbyregulatorycapitalrequirements
Principle5:(Othermacroprudentialtools):Thebufferisanimportant
instrumentinasuiteofmacroprudentialtoolsatthedisposalofthe
authorities

4.10 IntermsofjurisdictionalresponsibilityfortheCCBrequirement(for
internationallyactivebanks),thepowers/responsibilitiesofhomeandhost
relevantauthoritieswillbedividedasfollows:
Homeauthority:ensurethatthebankstheysupervisecorrectly
calculatetheirbufferrequirementsbasedonthegeographiclocation
oftheirexposures;settheirownbufferaddonsforexposuresto
jurisdictionsthatdonotoperateandpublishbufferaddons;require
thatthebankstheysupervisemaintainhigherbuffersiftheyjudge
thehostauthoritiesbuffertobeinsufficient
Hostauthority:leadinsettingbufferrequirementthatwouldapplyto
creditexposuresheldbylocalentitieslocatedintheirjurisdiction;
havetherighttodemandthattheCCBbeheldattheindividuallegal
entitylevelorconsolidatedlevelwithintheirjurisdiction
c BankSpecificCountercyclicalBufferRequirements
4.11 BankswillbesubjecttoaCCBbetweenzeroand2.5%oftotalriskweighted
assets,tobeappliedattheconsolidatedlevel.However,nationalsupervisors
mayapplytheCCBregimeatthesololeveltoconserveresourcesinspecific
partsofthegroup.TheCCBwillneedtobemetwithCommonEquityTier1
orotherfullylossabsorbingcapital(currentlyunderreview).
4.12 Thebufferthatwillapplytoeachbankwillreflectthegeographic
compositionofitsportfolioofcreditexposures.Internationallyactivebanks
willlookatthegeographiclocationoftheirprivatesectorcreditexposures
(includingnonbankfinancialsectorexposures)andcalculatetheirbank
specificCCBrequirementasaweightedaverageoftheCCBrequirements
thatarebeingappliedinalljurisdictionstowhichtheyhavecreditexposures
theseincludeallprivatesectorcreditexposuresthatattractacreditrisk
capitalchargeortheriskweightedequivalenttradingbookcapitalcharges
forspecificrisk,IRCandsecuritisation.
4.13 Theweightingappliedtothebufferinplaceineachjurisdictionwillbe
calculatedasfollows:
Bankstotalcreditriskchargethatrelatestoprivatesectorcredit
exposuresinthatjurisdiction(ultimateriskbasistobeused;i.e.jurisdiction
isthecountrywheretheguarantoroftheexposureresides,notwherethe
exposurehasbeenbooked)
dividedby
Bankstotalcreditriskchargethatrelatestoprivatesectorcredit
exposuresacrossalljurisdictions

5. Commentary/analysisoftheCountercyclicalCapitalBuffer
5.1 BelowisalinktotheTableofIssuesthatAFMEhassenttoBCBSonbehalfof
itsmembers.
TableofIssues
5.2 Asummaryoftheareasofprimaryconcerncanbepresentedasfollows.
Macroprudentialtoolbox
5.3 Thecountercyclicalbufferisonlyoneinthesuiteofmacroprudentialtools
butitisonewhichraisesmethodologicalquestions,concernsoverpotential
redistributioneffectsanditisalsolikelytobecomplextoimplementin
practice.AFMEmemberswouldwelcomeafurtherarticulationand
evaluationofthefullrangeofmacroprudentialtools,andinparticulartheir
interactionwiththeCCB.
InteractionwithBaselIIIframework
5.4 AFMEmemberswouldwelcomefurtherclarificationandassessmentofthe
interactionbetweentheCCBandotherpartsoftheBaselIIIframework,as
theyareconcernedaboutthepotentialduplicationofcapitalrequirements,
potentiallybuildingexcessconservatism,especiallyasitseemsunlikelyin
practicethatthebufferswouldbeabletobewithdrawnasquicklyas
suggested.Inparticular,memberswouldlikeclarityontheCCBsinteraction
withforwardlookingprovisioning,useofthroughthecycleanddownturn
parametersincreditandmarketriskmodelsinPillarIandothermeasures.
Aggregationofcreditexposures
5.5 AFMEmemberswouldwelcomefurtherclarityonthemannerinwhich
creditexposuresaretobeaggregated.Anyapproachadoptedmaygiverise
topotentiallysignificantinfrastructurerequirementsforbanks,whichmay
beunnecessarygivenotherchangesbeingintroducedtoaddresspro
cyclicality.
5.6 Theoperationalrequirementsareunclearandleaveopenthepossibilityof
largedifferencesbetweencountries,aswellasdifferencestoexisting
countryriskmethodologies.Thismeansthattheoperationalcostof
providingtheunderlyingdatarequiredcouldsignificantlyexceedthecosts
oftheproposedbuffer.InparticulartheBCBSguidanceinfootnote54could
requireawholenewsetofcalculations,particularlyifjurisdictionsrequire
bankstolookforthejurisdictionofultimateuse.Tradingactivitiesare
particularlydifficulttobringintotheconceptandurgentclarificationis
neededfromtheBCBSonsomeoftheoperationaldifficultiesofthecountry
exposuredetermination.
6. TransitionalRegime
6.1 Thecountercyclicalbufferregimewillbephasedininparallelwiththe
capitalconservationbufferbetween1January2016andtheyearend2018
becomingfullyeffectiveon1January2019.Thismeansthatthemaximum

countercyclicalbufferrequirementwillbeginat0.625%ofRWAson1
January2016andincreaseeachsubsequentyearbyanadditional0.625
percentagepoints,toreachitsfinalmaximumof2.5%ofRWAson1January
2019.