BCBS published guiding principles for the operationalization of a sectoral countercyclical capital buffer (SCCyB). The guiding principles are intended to support the implementation of a SCCyB on a consistent basis across jurisdictions. The guiding principles are defined by tailoring the broad-based CCyB principles on a sectoral basis. The guiding principles are not included in the Basel standards and are only applicable for the jurisdictions that choose to implement them voluntarily.
The SCCyB is a tool that can be used to complement the CCyB under Basel III. While additional capital requirements of a bank following the activation of CCyB depend on total risk-weighted assets, the SCCyB would allow national authorities to temporarily impose additional capital requirements that directly address the build-up of risks in a specific sector. The impact of a SCCyB would depend on the exposure of a bank to a targeted credit segment (such as residential real estate loans). Targeted tools such as the SCCyB may be effective to aid in building resilience early and in a specific manner, to more efficiently minimize unintended side effects, and may be used more flexibly than broad-based tools. The guiding principles for operationalization of a SCCyB cover the following aspects:
- Objectives—In taking buffer decisions, national authorities should be guided by the primary objective of the SCCyB, namely to ensure that the banking sector in aggregate has the capital on hand to help maintain flow of credit in the economy without its solvency being questioned, when faced with losses related to the unwinding of sectoral cyclical imbalances.
- Target segments—National authorities should define a small number of target segments. These segments should be potentially significant from a financial stability perspective and prone to cyclical imbalances. If jurisdictional reciprocity is deemed important, then, to facilitate voluntary reciprocation, the target segment should be defined in a way that ensures its replicability by jurisdictions other than the home jurisdiction.
- Interaction with the Basel III CCyB—Depending on the situation, national authorities may wish to either activate the SCCyB or the Basel III CCyB, or to activate both buffers simultaneously. An activation of the SCCyB instead of the Basel III CCyB should be based on an assessment demonstrating that imbalances are confined to a specific credit segment. When national authorities consider switching between the SCCyB and the Basel III CCyB and vice versa, a smooth transition should be ensured. This may include allowing both buffers to be activated simultaneously, in which case national authorities should ensure that the adding up of buffer rates does not result in double counting of risk.
- Indicators for Guiding SCCyB Decisions—National authorities should identify a transparent set of indicators that have the ability to act as early warning indicators for sectoral imbalances in their home countries and are associated with an increase in system-wide risk in the financial system.
- Calibration—National authorities should ensure an adequate calibration of the tool. An adequate calibration is key that the SCCyB can achieve its objectives.
- Release—The decision of the national authorities to promptly release the SCCyB when sectoral cyclical risks materialize should allow banks to absorb losses and maintain lending to the real economy. When sectoral cyclical risks do not materialize but are judged to recede more slowly, a gradual release of the buffer may be more appropriate.
- Communication—National authorities should integrate their decision-making on SCCyB into their strategy for communicating their decisions on the Basel III CCyB. As part of this strategy, they should establish a transparent communication on their assessment of broad-based versus more targeted cyclical systemic risks in the financial system to key stakeholders and the public (overall risk assessment).
Keywords: International, Banking, CCyB, SCCyB, Basel III, Macro-Prudential Tools, Systemic Risk, RWA, Sectoral CCyB, Regulatory Capital, BCBS
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