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COUNTER CYCLI­CAL CAP­I­TAL BUF­FERS

Daily Mail - - City & Finance -

That’s a mouth­ful. What is it? IT RE­QUIRES firms to bol­ster their fi­nan­cial de­fences ei­ther by is­su­ing shares or re­tain­ing earn­ings as a cush­ion against risks build­ing in the sys­tem.

It is no more tricky than the con­cept of mak­ing hay while the sun is shin­ing. Why do banks do this? Be­fore the fi­nan­cial cri­sis, banks were lend­ing lib­er­ally with­out enough cap­i­tal to cover their losses. But in times of down­turn, banks re­strict lend­ing, which means busi­nesses strug­gle to bor­row and so the econ­omy is driven down even fur­ther.

Main­tain­ing a healthy amount of cap­i­tal en­ables banks to ab­sorb losses dur­ing a down­turn, which is why they are now be­ing asked to build up these buf­fers. Who makes the banks do this? The rules were agreed by the Basel Com­mit­tee, which is a global body that sets stan­dards for the safety and sound­ness of banks. These stan­dards have been im­ple­mented un­der Euro­pean Union law.

Since May 2014, the Fi­nan­cial Pol­icy Com­mit­tee has had the re­spon­si­bil­ity to set the counter cycli­cal cap­i­tal buf­fers in the United King­dom. How does it work? If the counter cycli­cal cap­i­tal buf­fer is lifted, banks are given 12 months to meet it

If eco­nomic con­di­tions in­di­cate that a smaller cap­i­tal buf­fer is needed, banks can re­duce it straight away.

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