April 03, 2019

BCBS published a working paper on sectoral application of the countercyclical capital buffer (CCyB). The paper analyzes how a sectoral CCyB would affect financial stability and focuses on the insights on some of the operational issues in relation to the sectoral application of CCyB. The analysis suggests that a sectoral CCyB may be a useful addition to the CCyB framework.

This paper is a part of the sectoral CCyB work stream, which was initiated by the BCBS Research Task Force (RTF). The paper summarizes findings of the task force regarding the open issues identified by a literature review that was published in March 2018. Evidence shows that a sector CCyB increases resilience in the banking system at a lower cost than the Basel III CCyB. Moreover, it contributes to leaning against the wind by reducing excessive credit growth and credit risks in the targeted segments. However, the value-add of a sectoral CCyB in these dimensions depends on the structure of the banking sector and the broader financial system in a country. The paper also discusses a number of challenges in the design and use of a sectoral CCyB and offers some insights in this context. While the research conducted by the work stream provides insights on sectoral credit cycles as well as on the transmission mechanism and operationalization of a sectoral CCyB, there are still a number of open issues that warrant further analysis and research.

The paper aims to draw a number of policy insights, based on the five research projects. Two theoretical papers—one on a partial equilibrium framework by Galaasen and Solheim (2018) and Castro (2018) and the other one on a general equilibrium framework by Galaasen and Solheim (2018)—analyze the transmission mechanism of a sectoral CCyB and compare its effectiveness and efficiency to that of the Basel III CCyB. The empirical work conducted by the work stream consists of three papers. Two papers—by Ferrari and Rovira Kaltwasser (2019) for the United States and by Fiori and Pacella (2018) for Italy—focus on the link between sectoral credit cycles and systemic risk. One paper—by Behncke (2018)—analyzes the transmission mechanism of the Swiss sectoral CCyB on bank lending and risk taking. Additionally, the Appendix to the working paper presents a brief summary of the research projects of work stream members.

The work stream on sectoral CCyBs involved two deliverables that would contribute to the understanding of the sectoral application of CCyB: a review of the existing literature and a report summarizing original research conducted within the work stream. The literature review had showed that there is a justified need for sectoral macro-prudential tools. Moreover, the report on literature review argued that a sectoral CCyB may be a useful complement to both the Basel III CCyB and the existing targeted instruments in macro-prudential toolkit. 

 

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Keywords: International, Banking, CCyB, Sectoral CCyB, Basel III, Systemic Risk, Financial Stability, Macro-Prudential Policy, BCBS

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