News Excerpt
Based on the analysis of CCyB indicators, the apex bank has decided that it is not necessary to activate CCyB for one year or earlier.

Pre-Connect
•    The RBI had put in place the framework on counter cyclical capital buffer (CCyB) on February 5, 2015, wherein it was advised that the CCyB would be activated as and when the circumstances warranted.
•     This framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators.

Analytica
    Counter Cyclical Capital buffer is the mandatory capital to be kept by a bank to meet business cycle related risks in addition to other minimum capital requirements. 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 their own additional capital.
    This is an important theme of the Basel III norms.
    According to the RBI regulations, banks in India have to maintain a counter cyclical capital conservation buffer of 2.5% by 2019.

Basel III guideline
    The Basel III countercyclical capital buffer is calculated as the weighted average of the buffers in effect in the jurisdictions to which banks have a credit exposure. It is implemented as an extension of the capital conservation buffer. It consists entirely of Common Equity Tier 1 capital and, if the minimum buffer requirements are breached, capital distribution constraints will be imposed on the bank. Consistent with the capital conservation buffer, the constraints imposed relate only to capital distributions, not the operation of the bank.
    Banks must ensure that their countercyclical buffer requirements are calculated and publically disclosed with at least the same frequency as their minimum capital requirements.
    In addition, when disclosing their buffer requirement, banks must also disclose the geographic breakdown of their private sector credit exposures used in the calculation of the buffer requirement.


Capital Conservation Buffer (CCB)    Countercyclical Capital Buffer (CCyB)
    It is designed to ensure that banks build up capital buffers during normal times (i.e. outside periods of stress) which can be drawn down when losses are incurred during a stressed period.
    The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements.
    Therefore, in addition to the minimum total of 8%, banks will be required to hold a capital conservation buffer of 2.5% of RWAs (Risk weighted asset) in the form of Common Equity to withstand future periods of stress bringing the total Common Equity requirement of 7% of RWAs and total capital to RWAs to 10.5%.
    The capital conservation buffer in the form of Common Equity will be phased-in over a period of four years in a uniform manner of 0.625% per year, commencing from January 1, 2016.
        The purpose of countercyclical capital buffer is to achieve the broader macro-prudential goal of protecting the banking sector from periods of excess aggregate credit growth.
    A countercyclical capital buffer within a range of 0 – 2.5% of RWAs in form of Common Equity or other fully loss absorbing capital will be implemented according to national circumstances.
    For any given country, this buffer will only be in effect when there is 7 excess credit growth that results in a system-wide build-up of risk.
    The countercyclical capital buffer, when in effect, would be introduced as an extension of the capital conservation buffer range.


PEPPER IT WITH
Gilt-Edge Securities, Redefined PSL.

 Conclusion
The buffer is 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.