As part of its ongoing work programme on evaluating and monitoring the impact of its post-crisis reforms, the Basel Committee on Banking Supervision has considered the usability of capital buffers. This work has included engagement with a wide range of stakeholders, including banks, bank investors and other market participants, to discuss their views on the role of these capital buffers.
In light of these discussions, the Committee is publishing this newsletter to reiterate the importance of the capital buffer framework and to emphasise that buffers are designed to be usable.
Capital buffers are an important feature of the Basel III framework. These buffers - which comprise the capital conservation buffer, and by extension the countercyclical capital buffer and buffers for systemically-important banks - complement the Basel III minimum capital requirements. While each of these buffers seek to mitigate specific risks, they share similar design features and are all underpinned by the following objectives:
- absorbing losses in times of stress by having an additional overlay of capital that is above minimum requirements and that can be drawn down; and
- helping to maintain the provision of key financial services to the real economy in a downturn by reducing incentives for banks to deleverage abruptly and excessively.
The Committee continues to be of the view that banks and market participants should view the capital buffers set out in the Basel III framework as usable in order to absorb losses and maintain lending to the real economy. In practice, the Basel capital buffers are usable in the following manner:
- banks operating in the buffer range would not be deemed to be in breach of their minimum regulatory capital requirements as a result of using their buffers;
- banks that draw down on their buffers will be subject to the automatic distribution restriction mechanism set out in the Basel III framework; and
- supervisors have the discretion to impose time limits on banks operating within the buffer range, but should ensure that the capital plans of banks seek to rebuild buffers over an appropriate timeframe.
For jurisdictions that have activated the system-wide countercyclical capital buffer, the responsible authority would formally release the buffer in a downturn to help absorb losses and reduce the risk of the supply of credit being constrained by regulatory capital requirements.
While using capital buffers will assist banks in absorbing losses and continue to provide key services to the real economy, the Committee is of the view that banks should always seek to rebuild their capital strength in a timely manner. In addition to generating capital resources organically, banks should seek to pro-actively raise capital resources if necessary.
The Committee will continue to monitor the usability of capital buffers.
Note to editors:
The Basel Committee is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The Committee reports to the Group of Central Bank Governors and Heads of Supervision and seeks its endorsement for major decisions. The Committee does not possess any formal supranational authority and its decisions do not have legal force. Rather, the BCBS relies on its members' commitments to achieve its mandate. More information about the Basel Committee is available here.
Read the full paper at: https://www.bis.org/publ/bcbs_nl22.htm