On 27 November 2019, the Basel Committee on Banking Supervision (Basel Committee) published guiding principles for the operationalisation of a sectoral countercyclical capital buffer (SCCyB).
The Basel III standards introduced a countercyclical capital buffer regime (CCyB), which was phased in from 1 January 2016 and became fully effective on 1 January 2019. National authorities can implement a CCyB requirement to ensure that the banking system has an additional buffer of capital to protect against potential future losses related to downturns in the credit cycle. The Basel Committee believes that the SCCyB may be a useful complement to the CCyB. A SCCyB is a targeted macro-prudential measure that allows national authorities to impose capital requirements that directly address the build-up of risk in a certain sector.
The guiding principles have not been included as part of the Basel Standards. They are only relevant for jurisdictions that voluntarily choose to implement a SCCyB at a national level.
There are seven guiding principles:
- Principle 1: (Objectives): In taking buffer decisions, national authorities should be guided by the primary objective of the SCCyB, namely to ensure that the banking sector in aggregate has the capital on hand to help maintain the flow of credit in the economy without its solvency being questioned, when faced with losses related to the unwinding of sectoral cyclical imbalances;
- Principle 2: (Target segments): National authorities should define a small number of target segments. These segments should be: (i) potentially significant from a financial stability perspective; and (ii) prone to cyclical imbalances. If jurisdictional reciprocity is deemed important, then to facilitate voluntary reciprocation the target segment should be defined in a way that ensures its replicability by jurisdictions other than the home jurisdiction;
- Principle 3: (Interaction with the Basel III CCyB): Depending on the situation, national authorities may wish to either activate the SCCyB or the Basel III CCyB, or to activate both buffers simultaneously. An activation of the SCCyB instead of the Basel III CCyB should be based on an assessment demonstrating that imbalances are confined to a specific credit segment. When national authorities consider switching between the SCCyB and the Basel III CCyB and vice versa, a smooth transition should be ensured. This may include allowing both buffers to be activated simultaneously, in which case national authorities should ensure that the adding up of buffer rates does not result in double counting of risk;
- Principle 4: (Indicators for guiding SCCyB decisions): National authorities should identify a transparent set of indicators that have the ability to act as early warning indicators for sectoral imbalances in their home countries and are associated with an increase in system-wide risk in the financial system;
- Principle 5: (Calibration): National authorities should ensure an adequate calibration of the tool. An adequate calibration is key that the SCCyB can achieve its objectives;
- Principle 6: (Release): National authorities’ decision to promptly release the SCCyB when sectoral cyclical risks materialise should allow banks to absorb losses and maintain lending to the real economy. When sectoral cyclical risks do not materialise but are judged to recede more slowly, a gradual release of the buffer may be more appropriate; and
- Principle 7: (Communication): National authorities should integrate their decision-making on the SCCyB into their strategy for communicating their decisions on the Basel III CCyB. As part of this strategy, they should also establish a transparent communication on their assessment of broad-based versus more targeted cyclical systemic risks in the financial system to key stakeholders and the public (overall risk assessment).
The annex that appears at the end of the guiding principles discusses the interaction between the SCCyB and the Basel III CCyB. The Annex also provides examples of such interaction.