Topics Covered: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Counter cyclical capital buffer (CCyB) for banks
What to study?
For Prelims: Meaning of CCyB, about Basel Norms.
For Mains: Need for these measures and their significance.
Context: Reserve Bank has deferred implementation of countercyclical capital buffers (CCyB) and extended the realisation period for export proceeds.
The RBI had put in place the framework on counter-cyclical capital buffer (CCyB) on February 5, 2015, wherein it was advised that the CCyB would be activated as and when the circumstances warranted.
What Is a Countercyclical Capital Buffer (CCyB) in Banking?
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.
The rule was first introduced in Basel III as an extension of another buffer (called the capital conservation buffer). Basel III is a voluntary set of measures agreed upon by central banks all around the world. These measures were drafted by the Bank of International Settlements’ Basel Committee on Banking Supervision in response to the financial crisis of 2007-09, in order to strengthen regulation of banks and fight risks within the financial system.
- What are Basel norms?
- Capital conservation buffer vs Countercyclical Capital Buffer (CCyB).
Write a note on Basel norms and their significance.
Sources: the Hindu.