Countercyclical capital buffer
– a capital requirement for banks set by Norges Bank
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Countercyclical capital buffer
2.5%
Effective from 31 March 2023
What is the countercyclical capital buffer?
The countercyclical capital buffer (CCyB) is a part of banks’ total capital requirement. It is a macroprudential instrument used to safeguard financial stability.
The CCyB has two main objectives:
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To strenghten banks’ solvency - By requiring banks to build up capital during economic upturns, they will be better equipped to deal with economic crises and losses.
- To maintain credit supply - The CCyB is intended to mitigate the procyclical effects of tighter bank lending by enabling banks to maintain credit supply even during crises.
Norges Bank sets the countercyclical capital buffer rate each quarter. The countercyclical capital buffer is based on principles and on an information basis that comprises analyses and assessments of economic and financial conditions, such as cyclical vulnerabilities, access to credit and banks’ capacity to absorb losses. The countercyclical capital buffer is intended, in principle, to range between 0 percent and 2.5 percent. Norges Bank will normally set the rate in the upper part of this range. The countercyclical capital buffer may be reduced to counteract tighter bank lending in economic downturns.
The latest decision
Norges Bank sets the level of the buffer four times a year
Principles and information basis for Norges Bank’s decision
Principles for Norges Bank’s decision
Norges Bank sets the countercyclical capital buffer rate in accordance with the following principles:
The countercyclical capital buffer rate should reflect the Bank's assessment of cyclical vulnerabilities in the financial system. Experience shows that economic downturns are typically amplified following a period of high credit growth and sharply rising asset prices. The Bank's assessment of cyclical vulnerabilities is based on a broad range of indicators, empirical models and analyses.
Banks should as a main rule hold a countercyclical capital buffer. Such a buffer strengthens banks’ solvency and mitigates the risk that banks amplify an economic downturn. The countercyclical capital buffer is not an instrument for managing credit growth or asset prices. According to the capital framework, the countercyclical capital buffer is intended, in principle, to range between 0 percent and 2.5 percent. The buffer rate should normally be in the upper part of this range. This is supported by analyses of the need for time-varying capital buffers, such as stress tests. The buffer rate should not be reduced automatically even if there are signs that cyclical vulnerabilities are receding. If cyclical vulnerabilities recede substantially over time and the outlook for financial stability is good, the countercyclical capital buffer rate may be reduced. In the event of particularly high cyclical vulnerabilities, the countercyclical capital buffer rate may be set above 2.5 percent.
If a downturn will or could cause a marked reduction in credit supply, the countercyclical capital buffer rate should be lowered. A reduction in the buffer rate mitigates the risk of tighter lending standards, which could amplify the downturn. For the sake of predictability for banks, when the buffer rate is reduced, an estimate will be provided of the earliest expected date for when the countercyclical buffer rate will be raised again.
Information basis for the decision
Decisions on the level of the countercyclical capital buffer are based on four assessments. The four different assessments are:
- Cyclical vulnerabilities in the financial system. Assess cyclical aspects that may trigger or amplify a pronounced downturn.
- Access to credit. Assess whether there is or could be a need to reduce the countercyclical capital buffer rate because creditworthy firms and households cannot access credit.
- Banks’ capacity to absorb losses. Assess whether banks’ buffers are sufficient in a downturn, given the assessment of cyclical vulnerabilities.
- Effect of a change in the buffer requirement and the economy. Assess the importance of a change in the buffer rate before a decision is made to change the buffer rate.
