The countercyclical capital buffer (CCB) was introduced as part of the Basel III regime to help counter cyclicality in the financial system. Capital should be accumulated when cyclical systemic risk is judged to be increasing, creating buffers that increase the resilience of the banking sector during periods of stress when losses materialise. This will help maintain the supply of credit and dampen the downswing of the financial cycle. The CCB is also intended to dampen excessive credit growth during the upswing of the financial cycle.
Under the Capital Requirements Directive IV and Capital Requirements Regulation, which gave legal effect to the Basel III agreement in the EU, each member state has a designated authority which is responsible for setting the CCB rate in its jurisdiction. There is also a strong European element to the framework, with the European Systemic Risk Board having the power to issue guidance to national authorities on the implementation of the CCB framework.
In Cyprus, the Central Bank of Cyprus (CBC) is the designated authority responsible for setting the rate and the CCB rate applies to the total risk exposure amount of all licensed credit institutions and investment firms that provide the investment services of dealing on own account, underwriting of financial instruments or placing of financial instruments on a firm commitment basis, with the exception of small or medium-size investment firms (currently 60 in number) exempted by the CBC.
The CBC has recently announced that the CCB rate for the third quarter of 2018 will continue to be zero.
The main factor on which the CBC’s decision is based is the gap between the credit-to-GDP ratio and its long term trend, which is currently negative. In addition, the CBC considers non-financial private sector indebtedness, banking sector resilience, the real estate market, the real economy and external imbalances.
For further information on this matter please contact Dimitris Papoutsis or your usual contact at Elias Neocleous & Co LLC.