Countercyclical capital buffer – a contribution to financial stability

Banks are required to build a capital reserve when financial imbalances build up. This reserve is called a countercyclical capital buffer. The buffer rate is set by the Ministry of Finance each quarter, with Norges Bank in an advisory capacity.

In the event of an economic downturn and large bank losses, the buffer rate can be reduced. If the buffer functions as intended, banks will tighten lending to a lesser extent in a downturn. This may mitigate possible procyclical effects of banks' lending practices.

Norges Bank provides advice

The Ministry of Finance is responsible for setting the countercyclical capital buffer rate each quarter. Norges Bank has been tasked with preparing a decision basis for and advising the Ministry on the appropriate rate. In its work to prepare the decision basis, Norges Bank exchanges relevant information and assessments with Finanstilsynet (Financial Supervisory Authority of Norway). The decision basis is published in Norges Bank's Monetary Policy Report with financial stability assessment. Norges Bank's advice regarding the countercyclical capital buffer and a summary of the decision basis are submitted to the Ministry of Finance in connection with the publication of the Report. The advice is published when the Ministry has made its decision.

One of several instruments

A decision to increase the countercyclical capital buffer rate will normally become effective 12 months after the decision was made. A decision to reduce the buffer rate can become effective immediately. The buffer rate will as a rule be set between 0 and 2.5 percent of banks' risk-weighted assets. The rate will apply to all banks operating in Norway. The countercyclical capital buffer is one of several elements in the new capital adequacy framework for banks adopted by the Storting in June 2013. The Regulation on the Countercyclical Capital Buffer was laid down by the Government on 4 October 2013.

Literature

Criteria for an appropriate countercyclical capital buffer (Norges Bank Papers 1/2013)

Key indicators for a countercyclical capital buffer in Norway - Trends and uncertainty (Staff Memo 13/2013)

Published 4 December 2013 12:00
Edited 14 April 2016 15:14