Countercyclical capital buffer

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The countercyclical capital buffer (CCyB) is intended to ensure that credit institutions accumulate a sufficient capital base during economic growth periods in order to absorb losses in stressed periods; it will serve as a safety cushion thus enabling credit institutions to continue lending in a more challenging economic environment.

CCyB rate has been set every quarter, based on the methodology described in the European Systemic Risk Board recommendations. Calculation of the credit to GDP gap serves as a starting point in justification of the decision on the CCyB rate. In case of Latvia, the credit to GDP gap is calculated according to the “broad” and the “narrow” (which excludes the loans issued by non-banks) definition of credit, thereby obtaining two respective benchmark buffer rates. Benchmark buffer rate (as a percentage of risk weighed assets) is 0%, if the credit-to-GDP gap is equal to or less than 2 percentage points. In case the credit-to-GDP gap exceeds 2 percentage points, the benchmark buffer rate will increase linearly from zero to the upper threshold of risk-weighted assets at 2.5%. The benchmark buffer rate that best reflects the specificities of the national economy is selected as the CCyB guide. For Latvia, the results obtained from the calculations of the benchmark buffer rate under the narrow definition of credit are more justified than using the broad credit definition results. The data of the narrow credit time series are more stable (they are not retrospectively adjusted) and they become available sooner. Therefore, in Latvia the benchmark buffer rate that is calculated based on the narrow credit-to-GDP gap has been selected as the CCyB guide.

It should be noted that according to experience of other countries, the deviation of credit-to-GDP ratio from its long-term trend may not always be a reliable signal. In order to assess an increase in cyclical systemic risk and determine the CCyB rate, other quantitative indicators and constrained judgement should be considered as well, placing a great deal of emphasis on the qualitative assessment. Where necessary, the Financial and Capital Market Commission (FCMC) may set the CCyB rate that is higher than 2.5% of risk-weighted assets. Methodology involves the assessments of trends in the financial sector and real economy, including in the real estate market, by using a number of indicators, for example, lending growth, housing price dynamics, and others, which are considered important for the assessment of cyclical systemic risk.

In accordance with the Credit Institution Law, FCMC is the authority responsible for setting the countercyclical capital buffer in Latvia. Since 2015, the Commission has been setting and publishing the quarterly CCyB rate applicable to exposures to the residents of Latvia. The decision is taken after consulting the Bank of Latvia and the Ministry of Finance. Where FCMC sets the CCyB rate above zero for the first time, it also states the date from which the banks must apply that increased buffer rate. This date (except in exceptional circumstances) is 12 months after the date when the increased buffer setting is announced.

In accordance with the ESRB Recommendation (ESRB/2014/1), FCMC’s decisions on the appropriate countercyclical buffer rate are guided by the objective of protecting the banking system against potential losses associated with a build-up of cyclical systemic risk, thereby supporting the sustainable provision of credit to the real economy throughout the financial cycle. The FCMC will decide about the necessity to set the CCyB rate above 0%, when a significant rise in cyclical systemic risks is recorded in Latvia’s financial sector.

Every credit institution calculates institution-specific CCyB rate, taking into account the geographic distribution of its exposures and the CCyB rates set in the respective countries (FCMC’s Regulations No 133 “Regulations on calculating the institution-specific countercyclical capital buffer rate”). A credit institution applies this institution-specific CCyB rate to its total exposures when calculating the CCyB.

Last decision on the CCyB rate for the exposures to Latvian residents
Date CCyB rate In force from
06.08.2019 0% 01.08.2020

 

The CCyB rate currently in force for the exposures to Latvian residents
Decision date CCyB rate In force from
24.07.2018 0% 01.08.2019

 

Next decision on the CCyB rate for the exposures to Latvian residents

10/2019

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