Countercyclical capital buffer
The countercyclical capital buffer is intended to protect the banking sector against losses that could be caused by cyclical systemic risks increasing in the economy. Raising the countercyclical capital buffer requires banks to add capital at times when credit is growing rapidly so that the buffer can be reduced if the financial cycle turns down or the economic and financial environment becomes substantially worse. Banks can use the capital buffers built up to cover losses that may arise during periods of recession and to continue supplying credit to businesses and households.
Eesti Pank has the responsibility for setting the rate for the countercyclical capital buffer in Estonia. Eesti Pank bases its assessments of the need for capital buffers and their levels on the principles agreed by the European Union in the Capital Requirements Directive and also considers the specific features of the Estonian economy and financial system.
The countercyclical capital buffer in Estonia has two components, which are a base requirement that is generally held unchanged at a steady rate, currently 1%, and a cyclical component that is added to the base requirement if the cyclical risks from rapid growth in the debt of companies and households are increasing.
Eesti Pank assesses the need for the countercyclical buffer and decides on the rate for it once a quarter.
The countercyclical capital buffer requirement in Estonia
Buffer rate | Applies |
---|---|
1.5% | from 01.12.2023 |
1% | 07.12.2022–30.11.2023 |
0% | 01.01.2016–06.12.2022 |
Quarter 4, 2023
Eesti Pank raised the countercyclical capital buffer rate to 1.5% because of the increase in risks that followed from the rapid growth in credit in the preceding year and a half. The new buffer rate started to apply from 1 December 2023. Credit activity has since declined and the systemic risks coming from the financial cycle have stopped accumulating, and so Eesti Pank does not currently consider it necessary to raise the countercyclical capital buffer requirement any further.
- The applicable countercyclical capital buffer rate: 1.5%
- The standardised credit-to-GDP ratio: 108%; its deviation from the long-term trend:–8 percentage points
- The buffer guide: 0%
- The reasoning for the buffer rate. The yearly rate of growth in the debt of the non-financial sector was almost 7% at the end of the second quarter of 2023. The growth in debt has started to slow and is now below both the long-term rate of growth in the economy and the current nominal rate, but the rapid growth in credit in the preceding year and a half meant that there are still reasons to consider that the risks from the financial cycle remain present in Estonia. If the macroeconomic circumstances should unexpectedly and sharply deteriorate, there could be larger problems in repaying loans. It was consequently necessary to raise the countercyclical capital buffer to ensure that the banks have large capital reserves to cover the accumulated risks. Eesti Pank does not consider it currently necessary to raise the buffer rate any further.
Indicators and assessment for the countercyclical capital buffer rate
Earlier assessments for the countercyclical capital buffer rate
- Quarter 3, 2023 (.pdf)
- Quarter 2, 2023 (.pdf)
- Quarter 1, 2023(.pdf)
- Quarter 4, 2022 (.pdf)
- Quarter 3, 2022 (.pdf)
- Quarter 2, 2022.pdf
- Quarter 1, 2022.pdf
- Quarter 4, 2021.pdf
- Quarter 3, 2021.pdf
- Quarter 2, 2021.pdf
- Quarter 1, 2021.pdf
- Quarter 4, 2020.pdf
- Quarter 3, 2020.pdf
- Quarter 2, 2020.pdf
- Quarter 1, 2020.pdf
- Quarter 4, 2019.pdf
- Quarter 3, 2019.pdf
- Quarter 2, 2019.pdf
- Quarter 1, 2019.pdf
- Quarter 4, 2018.pdf
- Quarter 3, 2018.pdf
- Quarter 2, 2018.pdf
- Quarter 1, 2018.pdf
- Quarter 4, 2017.pdf
- Quarter 3, 2017.pdf
- Quarter 2, 2017.pdf
- Quarter 1, 2017.pdf
- Quarter 4, 2016.pdf
- Quarter 3, 2016.pdf
- Quarter 2, 2016.pdf
- Quarter 1, 2016.pdf
- Quarter 4, 2015.pdf
Decrees of the Governor of Eesti Pank
- Eesti Pank Governor’s Decree No. 16 of 29 November 2021 “The countercyclical capital buffer rate”
- Eesti Pank Governor’s Decree No. 8 of 1 December 2015 “The countercyclical capital buffer rate”
- Eesti Pank Governor’s Decree No.9 of 1 December 2015 “Calculating the Institution-Specific Countercyclical Buffer and Recognising Countercyclical Buffer Rates from Other Countries”
Countercyclical capital buffer rates in other countries:
- The European Systemic Risk Board (ESRB) publishes countercyclical capital buffer rates in other European Union countries.
- The Basel Committee on Banking Supervision (BCBS) publishes countercyclical capital buffer rates in Basel Committee member jurisdictions.