Countercyclical buffer

The countercyclical buffer is a macroprudential instrument the purpose of which is to alleviate cyclical fluctuations of credit in the economy and the consequences of such fluctuations.

During the upswing phase of the financial cycle, when credit grows excessively, imposing a countercyclical buffer as an additional capital requirement is aimed at the following:

1. constraining an increase in imbalances in the banking system stemming from excessive lending, the further growth of which might result in significant imbalances on the assets market financed by excessive credit, thereby increasing the probability of a financial crisis,
2. reinforcing banks’ resilience to a credit crunch by increasing banks’ capital base, thereby during the downturn phase when credit losses materialize, banks would not be forced to cut the amount of lending significantly, which in fact may facilitate exit from a recession.

During the downturn phase of the financial cycle it is possible to decrease, formerly set, the level of the countercyclical buffer. The purpose of such an action is to counteract an excessive contraction in the supply of lending to the economy.

See also