The Basel Committee on Banking Supervision has published a consultation proposal on 'countercyclical capital buffers', a tool it plans to use to manage the flow of credit into the economy and strengthen the global banking industry against future potential losses.
Under the proposal, when excess credit grows faster than gross domestic product and is judged to be associated with a build-up of system-wide risk, bank regulators will slowly increase their capital requirements - signalling those requirements clearly one year in advance. The committee expects countercyclical buffers to be triggered only once every 10 to 20 years. The higher capital requirements are intended to slow down credit bubbles and strengthen banks against financial difficulties, so that any future writedowns eat into the buffer rather than into the bank's capital base.
The committee expects that cross-border banks will calculate their buffer based on each country they are active in. The burden will be placed on national regulators to make domestic banks calculate their international exposure and associated buffers, which will be hard to regulate. The Association for Financial Markets in Europe has expressed concern that the plans will duplicate existing capital measures.
