The Basel Committee on Banking Supervision has today published its guiding principles for the operationalization of a sectoral countercyclical capital buffer (or "SCCyB"). The SCCyB complements the Basel Committee's countercyclical buffer by establishing capital requirements that could be imposed on a particular sector, in addition to the countercyclical buffer that is based on banks' total risk weighted assets. The SCCyB will only apply to jurisdictions that choose to implement it on a voluntary basis and will not form part of the Basel standards.
The target date for implementing the Basel Committee's countercyclical buffer was January 1, 2019. It allows national regulators to impose additional capital requirements upon banks during periods of excessive credit growth to prepare for a potential future downturn. The countercyclical capital buffer forms part of the Basel III global regulatory framework, and Basel members are therefore asked to implement appropriate countercyclical buffer requirements for their jurisdictions, taking the Basel III guidelines into account. By contrast, the voluntary nature of the SCCyB framework means that only those jurisdictions that choose to implement additional capital requirements on a sectoral basis will need to take the Basel Committee guidance into account. The guidelines set out seven key guiding principles that national regulators should consider when implementing the SCCyB, based on:
- Objectives - national authorities should consider the objective of ensuring solvency in the banking sector in the face of sector-specific credit losses when taking SCCyB decisions;
- Target segments - the sectors targeted by the buffer requirements should be those of systemic importance and prone to cyclical imbalances;
- Interaction with the Basel III countercyclical buffer - national regulators may choose to implement the SCCyB instead of, or in addition to, the countercyclical buffer;
- Indicators for guiding SCCyB decisions - national regulators should identify early warning indicators for emerging risk in relevant sectors that could be of systemic significance;
- Calibration - an appropriate level should be set for the buffer, which may be higher than the 2.5% countercyclical buffer;
- Release - national regulators should ensure SCCyB requirements are promptly released when sectoral cyclical risks begin to emerge; and
- Communication - SCCyB decisions should be communicated by national regulators as part of the communication strategy for Basel III countercyclical buffer decisions.