Banking on a holistic approach

Global banking regulators have issued guidance on adopting additional capital buffers, which regulators can use to push banks to add capital to meet rising risks.

The Basel Committee on Banking Supervision published principles for implementing a sectoral countercyclical capital buffer (SCCB), alongside the existing countercyclical capital buffers (CCB) required under Basel III.

While the existing capital buffer is based on banks’ risk-weighted assets, the sectoral buffer would enable regulators to “temporarily impose additional capital requirements that directly address the build-up of risks in a specific sector,” the Basel committee said.

For instance, the sectoral buffer could be used to address a bank’s exposure to a specific credit segment, such as residential mortgages.

“Targeted tools such as the SCCB may be effective to aid in building resilience early and in a specific manner, to more efficiently minimize unintended side effects, and may be used more flexibly than broad-based tools,” the committee said.

The mechanism is not part of the Basel capital standards, and only applies to countries that voluntarily implement it.