Buffer usability and cyclicality in the Basel framework

Today the Basel Committee on Banking Supervision publishes a second evaluation report assessing the impact of the implemented Basel reforms regarding buffers usability and cyclicality.

Following the issuance of the reforms, the Committee has prioritised evidence-based evaluations of the effectiveness of the Basel III standards. The first report Early lessons from the Covid-19 pandemic on the Basel reforms made an initial assessment of whether the Basel reforms have functioned as intended in light of Covid-19 pandemic. This follow-up report conducted an in-depth analysis of buffer usability and cyclicality in the framework, areas that were highlighted in the first evaluation report as warranting further consideration.

The report examines the lending implications and market reactions regarding:

(i) capital buffer usability;

(ii) countercyclical capital policy;

(iii) liquidity buffer usability; and

(iv) expected credit loss provisioning, capital and procyclicality.

Given the findings in the evaluation report, as well as the longer-term impacts of the pandemic, ongoing geopolitical events and the potential for new risks to emerge, the Committee stresses the importance of the prudent build-up and use of buffers at banks to smooth the impact of internal and external shocks. To increase the capital buffers that can be explicitly released in the event of sudden shocks, including those unrelated to the credit cycle, such as the impact of the Covid-19 pandemic, some authorities have set a positive cycle-neutral countercyclical capital buffer rate. In a newsletter also published today, the Committee notes its support for the ability of authorities to take this approach on a voluntary basis.