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, 2024

Eesti Pank raised the countercyclical capital buffer rate to 1.5% 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. Although borrowing has now eased off in Estonia, it is still necessary to maintain the buffers to protect against the risks that accumulated earlier.

  • 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 slowed to almost 3% by the end of the third quarter of 2023. The growth in debt has slowed 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 2021 and 2022 meant that there are still reasons to consider that the risks from the financial cycle remain present in Estonia. If the recession should continue, there could be larger problems in repaying loans. It is consequently necessary to ensure that the banks have large capital reserves to cover the accumulated risks.

 

Indicators and assessment for the countercyclical capital buffer rate


Decrees of the Governor of Eesti Pank

Countercyclical capital buffer rates in other countries:

Vaata lisaks