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