financial stabilitymacroprudential policy

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 1, 2025

Eesti Pank raised the countercyclical capital buffer rate to 1.5% to strengthen the resilience of the banks because of the risks that followed from the rapid growth in credit in 2021-2022. The new rate started to apply from 1 December 2023. Eesti Pank considers it appropriate in the first quarter of 2025 to keep the countercyclical buffer rate at 1.5%.

The reasoning for the buffer rate. The growth in the debt of the non-financial sector has been slower in the past five quarters than the long-term growth in the economy, but it would be premature to reduce the capital buffer requirement as the volume of overdue loans has increased further. The growth in debt accelerated sharply in the third quarter of 2024, and the strong growth in bank loans in the final months of the year points to the risk that growth in debt may have exceeded the long-term average nominal growth in the economy in the fourth quarter. Looking forwards, it will only be possible to cut the countercyclical capital buffer requirement to the base level of 1% in 2025 if the macroeconomic indicators improve, there is no further increase in the volume of overdue loans, and growth in debt does not accelerate to a level where it causes a new increase in cyclical risks.

  • The applicable countercyclical capital buffer rate: 1.5%
  • The gap between the growth in debt and the growth in long-term nominal GDP: –0.7 pp
  • The debt-to-GDP ratio: 114% (change in the quarter +2.4 pp, change over the year +4.6 pp)
  • The buffer benchmark rate: 1% (including the cyclical component 0%)

 

Indicators and assessment for the countercyclical capital buffer rate


Decrees of the Governor of Eesti Pank

Countercyclical capital buffer rates in other countries:

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