Question

    Under the Basel III guidelines, it is advised to create

    a countercyclical capital buffer of 0-2.5%. Which of the following is not true about this buffer?
    A It is intended to protect the banking sector against losses on account of systemic risks Correct Answer Incorrect Answer
    B It has to be used only when the credit growth in the economy is posing a system-wide risk Correct Answer Incorrect Answer
    C It is infrequent in nature and is to be created only when the regulator assesses potential risk and sets a limit of buffer to be created by the banks Correct Answer Incorrect Answer
    D The range of 0-2.5% means that it will be 0% when the capital conservation buffer (CCB) is 2.5% and vice versa. Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Losses incurred in the banking sector can be extremely large when a downturn is preceded by a period of excess credit growth. The countercyclical buffer (CCyB) is intended to protect the banking sector against losses that could be caused by cyclical systemic risks. CCyB will be deployed by national regulators when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses. This focus on excess aggregate credit growth means that regulators are likely to only need to deploy the buffer on an infrequent basis. Banks will be subject to a countercyclical buffer that varies between zero and 2.5% to total risk-weighted assets. The buffer that will apply to each bank will reflect the geographic composition of its portfolio of credit exposures’ on the other hand CCB is a separate buffer that is mandatory to be maintained by the banks at 2.5% of risk-weighted assets over and above their Min Tier I and Min CAR requirements.

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