Countercyclical capital buffer
The countercyclical capital buffer is a part of banks' total capital requirements and one of the macroprudential instruments used in Norway. The objective of the countercyclical capital buffer is to strengthen banks’ solvency and mitigate the risk that banks’ lending standards amplify an economic downturn.
Norges Bank sets the countercyclical capital buffer rate each quarter, after preparing a decision basis and exchanging information and assessments with Finanstilsynet (Financial Supervisory Authority of Norway). The decision basis is based on a broad set of indicators, models and market information and is in line with international recommendations.
Principles for Norges Bank’s decisions
Norges Bank’s decisions on the countercyclical capital buffer rate are based on 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 set of indicators, empirical models and analyses.
Banks should as a main rule hold a countercyclical capital buffer. The buffer will strengthen banks’ solvency and mitigate the risk that banks’ lending standards amplify an economic downturn. The buffer is not an instrument for managing credit growth or asset prices. According to the capital framework, the countercyclical capital buffer should, in principle, be set 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 can be reduced. If cyclical vulnerabilities reach a particularly high level, the buffer rate can 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 mitigates the risk of tighter lending standards that could amplify the downturn. For the sake of predictability for banks, when the buffer is reduced, the Bank will indicate the earliest date on which the buffer rate is expected to be raised again.
Information basis for the decision
Decisions on the level of the countercyclical capital buffer are based on four assessments and build on the principles described above. The four assessments are:
- Cyclical vulnerabilities in the financial system. Assess cyclical features that could 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 obtain credit.
- Banks’ capacity to absorb losses. Assess whether banks hold sufficient buffers to weather a downturn, given the assessment of cyclical vulnerabilities.
- Effects of a change in the countercyclical capital buffer rate on banks and the economy. Assess the impact of a change in the buffer rate on banks and the economy before a decision to change the rate is made.
For more information about the information basis, see Norges Bank Papers 4/2022.
Countercyclical capital buffer
Effective from 31 March 2023