Towards a sectoral application of the countercyclical capital buffer

In May 2017, the Basel Committee's Research Task Force initiated a work stream on sectoral countercyclical capital buffers (CCyBs). It was tasked to produce two deliverables that would contribute to the understanding of the sectoral application of the CCyB: (i) a review of the existing literature; and (ii) a report summarising original research conducted within the work stream.

The literature review was published in March 2018 and shows that there is a justified need for sectoral macroprudential tools. Moreover, it argues that a sectoral CCyB may be a useful complement to both the Basel III CCyB and existing targeted instruments in the macroprudential toolkit. Yet, countercyclical capital buffers, both broad-based and sectoral, remain largely untested and more work is needed to assess their ability to achieve the different objectives attributed to them. Furthermore, a sectoral application of the CCyB entails several challenges with respect to the design of the instrument and its interactions with the Basel III CCyB and other (targeted) instruments.

This research report summarises the RTF-CCyB work stream's findings regarding the open issues identified by the literature review. Two theoretical papers - Galaasen and Solheim (2018) in a partial equilibrium framework and Castro (2018) in a general equilibrium framework - analyse the transmission mechanism of a sectoral CCyB and compare its effectiveness and efficiency to that of the Basel III CCyB. The empirical work conducted by the work stream consists of three papers: two of them - Ferrari and Rovira Kaltwasser (2019) for the United States and Fiori and Pacella (2019) for Italy - focus on the link between sectoral credit cycles and systemic risk, and one - Behncke (2018) - analyses the transmission mechanism of the Swiss sectoral CCyB on banks' lending and risk taking.