Capital Buffers:
- Under Basel norms, there are capital requirements that can be imposed on financial institutions in excess of minimum capital requirements.
- The objective of these buffers is to counter the after effect of Economic shocks and losses on financial institutions’ assets.
- Capital buffers result in reduction of credit supply so as to safeguard their own solvency.
- Capital buffers are variable and flexible and penalties for non compliances are less stringent than for violations of minimum capital requirements.
The Capital Conservation Buffer (CCB) :
- CCB is a new concept introduced under BASEL III norms .
- The concept is to buildup a “Capital Buffer" during good times so that the same can be utilized during stress.
- The objective is to support the banks during the adverse economic environment conditions,
- It will help increase banking sector resilience both going into a downturn .
- In India, the minimum capital requirement is 9 % .
- The CCB should be by 2.5 % above minimum Capital ( The Total Works out to 9+2.5 =11.5 %)
COUNTER CYCLICAL BUFFER ( CCyB ):
- Counter-Cyclical Buffer for banks is intended to protect the banking sector against Losses that could be caused by cyclical systemic risks in the economy.
- Counter-Cyclical Capital Buffer requires banks to hold additional capital at times when credit rapidly grows up .
- The buffer can be reduced if the financial cycle turns favorable.
- Currently, this is not introduced in India.
Capital Conservation Buffer (CCB) vs COUNTER CYCLICAL BUFFER :
- The CCB is a permanent requirement while CCyB is a temporary measure.
- CCB is based on internal risk while CCy B is for cyclical risks in credit variation and economic conditions
India and Capital Buffers :
As of April 2023, Reserve Bank has been decided not to activate countercyclical capital buffer (CCyB) at this point as it is not required.
The framework on the countercyclical capital buffer (CCyB) was put
in place by the Reserve Bank of India (RBI) in terms of guidelines in February
2015 wherein, it was advised that the CCyB would be activated as and when the
circumstances warranted and that the decision would normally be pre-announced.
Bank Run:
- When several clients of a bank or other financial institution simultaneously withdraw their savings out of worry for the bank’s stability, this is known as a Bank Run.
- The likelihood of default rises as more individuals withdraw their money, which encourages additional people to do the same.
- Extreme circumstances may arise when the bank’s reserves are insufficient to cover the withdrawals.
