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Basel 3: CCCB – Countercyclical capital Buffer

BASEL 3 CCCB | COUNTERCYCLICAL CAPITAL BUFFER

 

This article discusses the Basel 3 CCCB and our JAIIB study material Nov 2022.

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The JAIIB exam is held by IIBF twice every year. JAIIB exam Nov 2022 is just around the corner and all those who wish to appear in the JAIIB Nov 2022 should gear up and use our JAIIB Nov material 2022 to get the best results in the Nov 2022 Exams. JAIIB study material for Nov 2022 includes various services like videos, notes, JAIIB mock tests Nov 2022, etc. All of these services are discussed later in the article. Now here’s our important topic of discussion, which is the Basel 3 Countercyclical Capital Buffer.

 

BASEL 3 norms is a comprehensive reform package. Basel 3 is a regulatory framework for more resilient banks and banking systems in December 2010.

Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, published in December 2010 by the Basel Committee on Banking Supervision, lays out the specifics of international regulatory standards on bank capital adequacy and liquidity, including a countercyclical capital buffer. The countercyclical capital buffer strives to make sure that the macro-financial environment in which banks operate is taken into consideration when determining capital requirements for the banking industry. Its main goal is to use a capital reserve to fulfill the broader macroprudential goal of safeguarding the banking industry against instances of excess aggregate credit growth, which are frequently linked to the accumulation of systemic risk.

 

COUNTERCYCLICAL CAPITAL BUFFER

The countercyclical capital buffer regime may aid in preventing the build-up phase of the credit cycle by virtue of its countercyclical nature. The regime should aid in lowering the possibility that regulatory capital requirements may limit the availability of credit during recessions, which could harm the actual economy’s performance and cause more credit losses in the banking sector.

The weighted average of the buffers in force in the jurisdictions to which banks have a credit exposure is used to compute the Basel III countercyclical capital buffer. As an expansion of the capital conservation buffer, it is used. It is fully made up of Common Equity Tier 1 capital, and the bank will face capital distribution restrictions if the minimum buffer requirements are not met. The restrictions put in place are in line with the capital conservation buffer and solely apply to capital distributions, not to how the bank operates.

Banks must make sure that the regularity with which they calculate and publicly disclose their countercyclical buffer requirements is at least equal to that of their minimum capital requirements. Banks are also required to disclose the regional split of their private sector credit exposures utilised in the buffer requirement calculation when revealing their buffer need.

When it comes to internationally active banks in member nations, jurisdictional reciprocity will be used. Parallel to the capital conservation buffer, the countercyclical buffer regime was introduced gradually between January 1st, 2016, and December 31st, 2018, and went into full force on January 1st, 2019. Governments have the option to impose stricter countercyclical buffer requirements. The reciprocity provisions of the regime will not apply in these circumstances to the additional sums or earlier time periods.

 

The CCCB – Countercyclical capital buffer is to achieve the broader macro-prudential goal of protecting the banking sector from periods of excess aggregate credit growth. Means if there is a economic slowdown this excess buffer will help the bank to come out of the built-up risk in the system. It is to be maintained in the range of 0 to 2.5% of common equity or another form of fully loss-absorbing capital.

The countercyclical capital buffer is implemented according to circumstances prevailing the circumstances in the country called National circumstances. Presently the Countercyclical capital Buffer – CCCB is not implemented in India.

The countercyclical capital buffer (CCCB) is designed to guard the banking industry from periods of excessive aggregate loan expansion, which are frequently linked to the accumulation of systemic concerns. As of 2019, the CCCB framework is completely operational.

Authorities must activate and enhance the CCCB in accordance with Basel III when they determine that aggregate credit growth is excessive and linked to a rise in systemic risk. In a downturn, the buffer would then be depleted to help banks sustain the flow of credit to the economy.

The BCBS also released recommendations for decision-makers in the CCCB. This calls for the adoption by the authorities of a universally recognised standard buffer guide based on the total private sector credit to GDP ratio. Authorities are free to depend on other indicators when determining the appropriate CCCB rate, but this framework provides a common baseline for determining the magnitude of the buffer.

The CCCB must be covered by CET1 capital and range from 0 to 2.5% of the total risk-weighted assets. Banks must calculate and disclose their CCCB requirements at least as frequently as their minimum capital requirements under Basel III. The necessity that a jurisdiction pre-announce its plan to raise the CCCB level by up to 12 months stems from the fact that banks need time to adapt to a rise in buffer requirements. On the other hand, a jurisdiction’s decision to lower the CCCB’s level will become effective right away.

The capital conservation buffer is extended by the use of the CCCB. As a result, banks that do not meet their CCCB requirements automatically face distribution limitations. Table 2 depicts how a fictitious bank subject to a CCCB of 2.5 percent would be impacted by the capital distributions.

The CCCB also introduces jurisdictional reciprocity, which is a novel element. An authority is required to swiftly notify its overseas counterparts when the buffer is activated in a jurisdiction. Authorities in other jurisdictions should then demand that their banks apply the buffer to their exposures elsewhere. By establishing a reciprocal system, regulatory arbitrage and cross-border spill-overs are minimised. All BCBS member jurisdictions are required to reciprocate for CCCBs up to 2.5 percent. The weighted average of the CCCB rates established by the jurisdictions where a bank has exposures is used to determine the bank’s CCCB rate.

 

IMPORTANCE OF COUNTERCYCLICAL CAPITAL BUFFER

The CCCB not only serves as a reserve that may be used in times of need, but it also prevents systemic risks by limiting out-of-control bank credit expansion. Events known as “systemic hazards” have the potential to not only affect certain banks but also the entire financial system. The financial crisis of 2008–2009 is an illustration of how systemic risks can manifest themselves; it was precipitated by individual subprime mortgage failures and a credit crunch for banks, and it was the largest financial catastrophe to ever hit the US. The Basel committee, which is made up of banking regulators, developed the Basel-III guidelines following the financial crisis, which established new regulatory standards for bank capital adequacy and liquidity. These standards included the introduction of the CCCB.

 

Now that we have discussed CCCB at length we would like to move on to the latest JAIIB study material Nov 2022.

 

JAIIB STUDY MATERIAL NOV 2022

Our JAIIB study material Nov 2022 includes the following services:

  • Recorded and live video lectures.
  • JAIIB mock tests Nov 2022 are available for you to solve.
  • Short notes in the form of epdfs are available for your quick revision.
  • Both Hindi and English languages for the video course are available.

 

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