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, 2024

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. Although growth in debt has now eased off in Estonia, it is still necessary to maintain the buffers to protect against the risks that accumulated earlier.

The reasoning for the buffer rate. The growth in borrowing by the non-financial sector has been moderate in the past year and the danger of cyclical risks building up has eased. Although the slower growth in debt in numerical terms in comparison to long-term nominal GDP has reduced the buffer benchmark rate to 1%, the share of overdue and non-performing loans in the loan portfolios of the banks has increased further, and so there remains the risk of loan losses occurring. This makes it currently justified for the banks to continue to hold a 1.5% countercyclical capital buffer to cover the realisation of this risk.

  • The applicable countercyclical capital buffer rate: 1.5%
  • The gap between the growth in debt and the growth in long-term nominal GDP: –4 pp
  • The debt-to-GDP ratio: 110% (change in the quarter –0.1 pp, change over the year +0.7 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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