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. Countercyclical capital buffers require banks to hold 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 they have built up during the growth phase of the financial cycle to cover losses that may arise during periods of stress and to continue supplying credit to the real economy.

Eesti Pank has been given the responsibility for setting the levels for the countercyclical capital buffer in Estonia. Eesti Pank bases its assessments of the capital buffers and their levels on the principles agreed by the European Union in the Capital Requirements Directive and also considers the specific requirements of the Estonian economy and financial system.

Eesti Pank assesses the need for the countercyclical buffer and decides on the rate for it once a quarter.

Quarter 3, 2022

The Eesti Pank assessment in September 2022 is that the growth in credit has increased the risks from the financial cycle and it may be necessary quite soon to raise the countercyclical capital buffer rate in response to those risks. The countercyclical capital buffer rate has two parts: the base rate, which is the base requirement that does not change under ordinary circumstances, and the cyclical component, which is related to high credit growth. Eesti Pank set the base rate of the countercyclical capital buffer at 1% in November 2021 and the banks have to comply with that from 7 December 2022. Eesti Pank has not so far changed the cyclical component.

  • The applicable countercyclical capital buffer rate: 1%, of which the cyclical component is 0%, from 7 December 2022
  • The standardised credit-to-GDP ratio: 110%; its deviation from the long-term trend: –11 percentage points
  • The buffer guide: 0%
  • The reasoning for the buffer rate. Several indicators point to an increase in risks from the financial cycle. Growth in borrowing from banks has been fast for both housing loans and corporate loans, and real estate prices are also rising fast. However the indebtedness of the non-financial sector has not increased, but has continued to decline andthe rate of growth in debt does not yet exceed that in nominal GDP. It is expected though that debt will continue to grow fast and the slower growth in the economy could start to increase the indebtedness. For this reason Eesti Pank considers it possible that it may be necessary in the near future to raise the countercyclical capital buffer rate requirement above its current base level of 1% to counter the increased cyclical 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