What is the countercyclical capital buffer?
The countercyclical capital buffer is a component of the total capital requirement that banks must meet to become more resilient. It is intended to contribute to building bank capital during upturns so that they are resilient to larger losses.
During downturns, the buffer rate can be reduced. This can prevent banks from amplifying a downturn by over-tightening their lending to comply with capital requirements.
Norges Bank issues advice to increase the buffer when financial imbalances are building up or have built up. The assessment is in part based on developments in household and corporate debt and property prices.
Financial imbalances increase the risk of an abrupt decline in demand and bank loan losses. The buffer rate can be reduced in the event of an economic downturn and large bank losses.
The Ministry of Finance sets the level of the buffer four times a year. Norges Bank draws up a decision basis and provides advice to the Ministry of Finance regarding the level of the buffer. The advice is submitted to the Ministry of Finance in connection with the publication of Norges Bank’s Monetary Policy Report. The advice is published when the Ministry of Finance has made its decision.
The buffer rate shall ordinarily be between 0 and 2.5 percent of banks’ risk-weighted assets, but in special circumstances may be set higher.