The CNB's approach to releasing the countercyclical capital buffer

Libor Holub, Tomas Konecny, Lukáš Pfeifer and Václav Brož

from Czech National Bank, Research and Statistics Department

Abstract: This article describes the CNB's approach to releasing the countercyclical capital buffer (CCyB). The CCyB will be released in the recessionary phase of the financial cycle, which is characterised by declining cyclical risks in institutions' balance sheets. Where a severe recession or financial crisis gives rise to systemic credit losses, a decrease in banks' capitalisation and a subsequent fall in the available capital capacity for lending, the CNB is likely to lower the CCyB rate, potentially all the way to zero, depending on the losses. The CNB will also consider releasing the buffer in cases where systemic losses have not yet occurred but are highly likely to do so in the near future. In a shallow recession or an economic slowdown, when cyclical risks are for the most part disappearing naturally from institutions' balance sheets, the CNB will consider gradually lowering the CCyB rate to its standard level of 1%. This article illustrates these approaches using the decision-making process for releasing the CCyB in two alternative scenarios of declining cyclical risks. It also presents an estimate of the effect on the economy of the potential credit impulse associated with the release of the CCyB.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:ocpubc:tafs2020/3

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