Countercyclical Capital Buffer

1. In Apr 2024, the Reserve Bank of India (RBI) has decided not to activate the countercyclical capital buffer (CCCB) at this time.
2. The CCCB framework was established by the RBI on February 5, 2015, and it stated that CCCB would be activated when needed.

About Capital Buffers

1. A capital buffer is extra capital that financial institutions must keep in addition to their basic requirements.
2. These buffers are part of the Basel III reforms by the Basel Committee on Banking Supervision.
3. The Basel Committee issued regulatory requirements in December 2010 to make the global banking system more resilient (strong, quick to recover), especially regarding liquidity.
4. Basel III reforms identify various buffers, including countercyclical capital buffers and capital conservation buffers.

About Countercyclical Capital Buffer

1. CCCB is a regulatory measure for banks which aimed at strengthening the banking system during economic booms and reducing the risk of financial crises.
2. When the economy is doing well, banks lend a lot of money, which can lead to too much borrowing and create a financial bubble.
3. While, when the economy is doing poorly, banks lend less money, which can make the recession worse.
4. The CCCB is designed to counter act these cycles. The CCyB makes banks hold extra money during good economic times. This extra money helps them stay strong and safe if the economy turns bad.
5. When the economy is doing well, banks are required to save more money as a safety net. This means they might lend a bit less than they otherwise would, which helps reduce the risks.
6. When the economy is doing poorly, the rules are relaxed so banks can use the extra money they saved up during good times. This helps them continue lending and supporting the economy.

Related Term: Capital Conservation Buffer

1. Banks are required to hold a certain amount of capital to cover potential losses. The Capital Conservation Buffer is an additional amount of capital that banks must hold on top of this minimum requirement.
2. This buffer acts as a cushion during tough times, like economic downturns or unexpected losses.
3. Basel standards mandate the buffer's gradual implementation, reaching a total of 2.5% by March 31, 2019.
4. It was introduced after the 2008 financial crisis to help banks withstand tough economic times.

About Basel III

1. In December 2010, the Basel Committee on Banking Supervision published ‘Basel III: A global regulatory framework for more resilient banks and banking systems.’
2. This document outlines global regulatory standards on bank capital adequacy and liquidity, including the countercyclical capital buffer.

1. Bank capital adequacy essentially refers to how much financial cushion a bank has to absorb potential losses.
2. Capital adequacy rules ensure banks have enough of this cushion to handle tough times without collapsing. It's like having enough savings to cover unexpected expenses.

Must Check: UPSC Coaching Institute In Delhi