Countercyclical capital buffer
Banks should build a capital buffer 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 a severe economic downturn and clearly reduced access to credit, the buffer should be lowered. 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.
A contribution to financial stability
The countercyclical capital buffer comes in addition to the minimum requirement and the other buffer requirements. All of the capital buffers strengthen banks’ solvency, but the countercyclical capital buffer is the only buffer that is meant to be reduced in a downturn to support credit provision.
The countercyclical capital buffer is also the only buffer requirement that is also automatically applicable to foreign banks operating in Norway. This is called automatic reciprocity and is laid down in the Basel Committee’s recommendations and in the EU capital framework.
The buffer rate will normally be between 0 and 2.5%. The buffer can also be set above 2.5% in special circumstances. But automatic reciprocity for countercyclical capital buffer only applies for rates up to and including 2.5%. When the buffer rate exceeds 2.5%, reciprocity is optional. The ESRB also recommends reciprocity for buffer rates above 2.5%.