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      Question

      Which Basel III concept specifically addresses the

      build-up of systemic risk during periods of excessive credit growth, and can be activated by national regulators to require banks to hold additional capital as a buffer?
      A Capital Conservation Buffer (CCB) Correct Answer Incorrect Answer
      B Counter-Cyclical Capital Buffer (CCyB) Correct Answer Incorrect Answer
      C Systemic Risk Buffer (SRB) Correct Answer Incorrect Answer
      D Net Stable Funding Ratio (NSFR) Correct Answer Incorrect Answer
      E Leverage Ratio Framework Correct Answer Incorrect Answer

      Solution

      The Counter-Cyclical Capital Buffer (CCyB) is a macroprudential tool under Basel III that national regulators (like RBI) can activate during periods of excessive aggregate credit growth which often signals the build-up of systemic financial vulnerability. When activated, CCyB requires banks to hold additional CET1 capital (up to 2.5% of RWA) as a buffer. During economic downturns, when credit contracts, the CCyB is released, allowing banks to use this capital to absorb losses and maintain lending. The Capital Conservation Buffer (CCB) is always-on and protects individual bank solvency; the CCyB is time-varying and macroprudential.

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