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News: The Reserve Bank of India has said it will not activate the countercyclical capital buffer (CCyB) as the measure is not required in the current circumstances.
About Countercyclical Capital Buffer (CCyB) for Banks
- Countercyclical Capital Buffer (CCyB) for Banks is a macro-prudential tool that requires banks to build up additional capital during periods of excessive credit growth.
- It is part of the Basel III norms to build resilience during credit booms.
- How it was introduced: In the backdrop of the 2008 global financial crisis, the Group of Central Bank Governors and Heads of Supervision (GHOS), the overseeing body of the standards set by the Basel Committee, envisaged the introduction of a framework on countercyclical capital measures.
- Aim: The aim of the Countercyclical Capital Buffer is two fold –
- It requires a bank to build up a buffer of capital in good times, which may be used to maintain the flow of credit to the real sector in difficult times.
- It achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk.
- Framework on countercyclical capital buffer (CCyB): As per the framework on countercyclical capital buffer (CCyB) laid out in the RBI (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025, CCyB would be activated as and when circumstances warranted, and the decision would normally be pre-announced.
- The framework envisages the credit-to-GDP gap as the main indicator, which may be used in conjunction with other supplementary indicators.
