Cyprus: Countercyclical capital buffer

Author: | Published: 16 Jul 2018
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Under the Basel III regime, in order to counter cyclicality in the financial system, capital should be accumulated when cyclical systemic risk is judged to be increasing, creating a countercyclical capital buffer (CCB) that increases the resilience of the banking sector during periods of stress when losses materialise. This will help maintain the supply of credit and moderate the downswing of the financial cycle. The requirement to add to the CCB also dampens 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 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.

In Cyprus, the Central Bank of Cyprus (CBC) is the designated authority 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 (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 at the moment is negative. The CBC also considers non-financial private sector indebtedness, banking sector resilience, the real estate market, the real economy and external imbalances.

Neocleous
Elias Neocleous Dimitris Papoutsis