Countercyclical Capital Buffer

Explanation :

• 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.
• It aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate.
• It 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).