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Countercyclical capital buffer


The countercyclical capital buffer, aims to address pro-cyclicality in the financial system. When cyclical systemic risk is judged to be increasing, the capital of credit institutions should increase by creating buffers.  These buffers increase the resilience of the banking sector during periods of stress when losses materialise, thus ensuring the supply of credit and mitigating the effects during the downturn of the financial cycle. The countercyclical capital buffer can also contribute towards reducing excessive credit growth during the upswing of the financial cycle.

The methodology applied for the setting of the countercyclical capital buffer rate, is set out in the provisions of Macroprudential Oversight of Institutions Laws of 2015 to (No. 2) 2021 (L. 6(I)/2015) and takes into account Recommendation ESRB/2014/1 of the European Systemic Risk Board (ESRB).

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

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 capital 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 capital buffer rates for exposures of institutions to each material third country; and

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

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