From UPSC perspective, the following things are important :
Prelims level : Countercyclical Capital Buffers (CCyB)
Mains level : Various minimum capital requirements measures
The RBI has announced that banks need not activate countercyclical capital buffers (CCyB) amid slowdown due to COVID-19 outbreak.
What is Countercyclical Capital Buffer (CCyB)?
- A capital buffer is a mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements.
- CCyB is the capital to be kept by a bank to meet business cycle related risks. It is aimed to protect the banking sector against losses from changes in economic conditions.
- Banks may face difficulties in phases like recession when the loan amount doesn’t return.
- To meet such situations, banks should have own additional capital. This is an important theme of the Basel III norms.
CCyB framework in India
- The framework on CCyB was put in place by the RBI in terms of guidelines issued in 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted.
- The framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators.
- It requires banks to build up a buffer of capital in good times, which may be used to maintain flow of credit to the real sector in difficult times.
- The buffer was also meant to restrict the banking sector from indiscriminate lending in the periods of excess credit growth, which have often been associated with the building up of system-wide risk.