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Countercyclical buffer rate


Setting countercyclical buffer rate for exposures in the Republic

The countercyclical buffer rate is a macroprudential tool that the Central Bank of Cyprus (CBC) has at its disposal and may use to increase the resilience of the financial system towards time varying risks that the system encounters. 

The macroprudential policy of the CBC for setting the countercyclical buffer rate allows the introduction of a positive countercyclical buffer rate when cyclical systemic risks are on the rise but also during periods of neutral cyclical systemic risks, i.e. when cyclical systemic risks are neither elevated nor subdued. 

The aim of the CBC when setting the countercyclical buffer rate is to create a safety buffer and increase the resilience of the financial sector during periods of stress, when losses materialise, supporting the supply of credit to the economy and mitigating the impact of the downturn of the financial cycle. The countercyclical buffer can also contribute towards reducing excessive credit growth during the upswing of the financial cycle.

The methodology applied for the assessment and setting of the countercyclical buffer rate, is based on the abovementioned CBC macroprudential policy and on the Macroprudential Oversight of Institutions Laws of 2015 to 2022. The said methodology takes into consideration Recommendation ESRB/2014/1 of the European Systemic Risk Board (ESRB).

The countercyclical buffer rate is reassessed on a quarterly basis, adjusted if necessary and published in the Macroprudential policy decisions.

 

Recognising and setting countercyclical buffer rates for exposures to third countries

Under sub-recommendation B of the ESRB Recommendation on recognising and setting countercyclical buffer rates for exposures to third countries (ESRB/2015/1), it is recommended that national macroprudential authorities formulate a macroprudential policy which identifies material third countries for the banking system and to monitor risks arising from excessive credit growth in these countries. Under sub-recommendation D of this Recommendation, it is recommended that national macroprudential authorities should amend their communication framework to encompass decisions on recognising and setting countercyclical buffer rates for exposures to third countries.

As a result, the CBC has defined its macroprudential policy on:

a) setting a list of criteria for the assessment of the materiality of third countries for the Cyprus banking system, in relation to the recognition and setting of countercyclical buffer rates for exposures of institutions to each material third country; and

b) setting the countercyclical buffer rate on exposures of institutions to third countries.

This policy document also describes how the CBC has complied with sub-recommendation D.