Basel iii Compliance Professionals Association (BiiiCPA)www.basel-iii-association.com
Basel iii Compliance Professionals Association (BiiiCPA)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.com
Basel III: The Countercyclical buffer
A. IntroductionLosses incurred in the banking sector can be extremely large when adownturn is preceded by a period of excess credit growth.These losses can destabilise the banking sector and spark a vicious circle,whereby problems in the financial system can contribute to a downturn inthe real economy that then feeds back on to the banking sector.These interactions highlight the particular importance of the bankingsector building up additional capital defences in periods where the risksof system-wide stress are growing markedly.The countercyclical buffer aims to ensure that banking sector capitalrequirements take account of the macro-financial environment in whichbanks operate.It will be deployedby national jurisdictionswhen excess aggregate creditgrowthis judged to be associated with a build-up of system-wide risk toensure the banking system has a buffer of capital to protect it againstfuture potential losses.This focus on excess aggregate credit growth means that jurisdictions arelikely to only need to deploy the buffer on an infrequent basis.The buffer for internationally-active banks will be a weighted average of the buffers deployed across all the jurisdictions to which it has creditexposures.