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 3, 2023

Eesti Pank decided in November 2022 to raise the countercyclical capital buffer rate to 1.5%, as rapid credit growth had increased the risks from the financial cycle. Credit activity has since declined 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% and 1.5% from 1 December 2023
  • The standardised credit-to-GDP ratio: 108%; its deviation from the long-term trend: –9 percentage points
  • The buffer guide: 0%

The reasoning for the buffer rate. The yearly rate of growth in the debt of the nonfinancial sector was 10% at the end of the first quarter of 2023, which is faster than the long-term nominal growth in the economy. Faster growth in debt than in the economy is an indicator of risks from the financial cycle. If the macroeconomic circumstances should unexpectedly and sharply deteriorate, there could be problems in repaying loans that could be made worse by the earlier rapid growth in borrowing. It was consequently necessary to raise the countercyclical capital buffer to ensure that the banks have large capital reserves to cover the accumulated risks. Activity in taking bank loans has been diminishing since the final months of 2022 and growth in the aggregate loan portfolio of the banks has slowed, so the danger of cyclical risks building up further has been eased. In consequence, Eesti Pank does not currently consider it necessary to raise the countercyclical buffer rate above 1.5%.

 

 

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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