RBI`s Countercyclical capital buffer(CCyB)

Context

The Reserve Bank of India decided not to activate the Countercyclical capital buffer as it find that it is not needed at this point in time.

 CCyB and its objective

• The CCyb indicates the time-varying capital requirement applied to banks and investment firms with the aim to promote a sustainable provision of credit to the economy by making the banking system more resilient and less pro-cyclical.

• This framework on countercyclical capital measures has been envisaged in the backdrop of the 2008 global financial crisis by the group of central bank governors and heads of supervision and the Basel Committee on banking supervision.

• Basel committee had presented the details of CCyB in Basel 3: A global regulatory framework for more resilient banks and banking system in December,2010

• These CCyB measures were adopted with a primary objective to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have been associated with the build-up of system-wide risk.
• As per Basel 3 norms, CCyB is being calculated as the weighted average of the buffers in effect in the jurisdictions to which banks have a credit exposure.
• In India, the framework on the CCyB was put in place by the RBI in terms of guidelines in 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted and RBI will pre-announced the decision on that.

• The credit-to-GDP gap is adopted as the main indicator for the implementation guidelines of CCyB in India.

• RBI has envisaged the two basic objectives with the CCyB
• Firstly, to motivate banks 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.
• Secondly, to achieve the broader macroprudential goal of restricting the banking sector from indiscriminate lending in periods of excess credit growth that have been associated with the building up of system-wide risk.