What is Countercyclical Capital Buffer?

The Reserve Bank of India (RBI) has announced that it will not activate the Countercyclical Capital Buffer (CCyB) at the present stage, stating that the measure is not required under the current economic and financial conditions.

In a statement issued from Mumbai, the RBI said that after a review and empirical analysis of various CCyB indicators, including the credit-to-GDP gap as the principal indicator, it found no need to activate the buffer at this point in time. However, the central bank clarified that the system can be activated as a pre-announced measure under warranted circumstances in the future.

About Countercyclical Capital Buffer

The Countercyclical Capital Buffer is a macroprudential tool introduced under the Basel III framework to strengthen the resilience of the banking sector against system-wide financial risks.

The objective of the CCyB is twofold. First, it requires banks to accumulate additional capital during periods of strong economic growth and favorable financial conditions. This extra capital can later be utilized during periods of economic stress to maintain the flow of credit in the economy.

Second, the mechanism aims to prevent excessive and indiscriminate lending during phases of rapid credit expansion, which often contribute to the build-up of systemic financial risks. By restraining excessive credit growth, the CCyB helps ensure financial stability and reduces vulnerabilities in the banking system.

Under the Basel III framework, banks are required to maintain a countercyclical capital buffer within a prescribed range whenever the central bank assesses that systemic risks are increasing due to excessive credit growth.

The RBI’s latest decision indicates that, despite ongoing economic activity and credit growth, the current level of systemic risk does not warrant the activation of additional capital requirements for banks.

Source: AIR & BIS