Countercyclical capital buffer

The countercyclical capital buffer was introduced into international regulation for credit institutions after the financial crisis as part of a larger set of reforms to make the financial sector more robust.

The buffer shall be built in periods when risks in the financial system build up. This will typically be in periods of optimism, low risk perception, rising asset prices and lenient credit terms, such as was the case in the years leading up to the financial crisis. The goal is that the buffer is built up before risks materialise, for example, before the financial system is exposed to a negative shock. In periods of financial stress, the buffer is released and credit institutions can use the released capital to maintain adequate credit.

Countercyclical capital buffer

Purpose

The purpose of the countercyclical buffer is to reduce the downturn in the real economy that would otherwise follow if households' and companies' access to credit are tightened excessively during periods of stress in the financial system. This means that the countercyclical capital buffer should be built up during good times, when risks in the financial system accumulate, and can be released if systemic risks materialise.

In periods of financial stress, the buffer is to be released gradually or fully and the institutions can use the released capital to maintain adequate extension of credit. 

Countercyclical capital buffer

Rebuilding of the buffer

Every quarter, the Council assesses the adequate countercyclical capital buffer level. The Council still finds it appropriate to increase the countercyclical capital buffer to 2.5 per cent from March 2023, which was decided by the Minister for Industry, Business and Financial Affairs in March 2022. The objective of the buffer is to ensure that the institutions have a cushion that makes them more resilient if risks materialise. The current earnings also create an opportunity to build up capital to absorb losses and maintain credit granting. The Council is ready to recommend a reduction of the buffer rate with immediate effect if stress occurs in the financial system and there is a risk of severe tightening of credit granting to households and companies.

Countercyclical capital buffer

Methodology for assessing the buffer rate

The Council assesses the level of the countercyclical capital buffer rate every quarter. The information base used in the Council's assessment is described in the Council's methodology note.

The Council may make recommendations on the use of the countercyclical capital buffer. It is the Minister for Industry, Business and Financial Affairs who is responsible for the quarterly setting of the buffer rate in Denmark. The minister may either comply with the recommendation or submit an explanation to why a recommendation is not followed.

In 2017 the Council revisited the method to assess the level of the countercyclical capital buffer rate. The previous method was published in 2014. The revision incorporates the Council's own experiences as well as experiences abroad during the three year period. As more experience is gained, the Council will further develop its methodology for setting the buffer rate.

In June 2019, the European Systemic Risk Board, ESRB, assessed that Denmark's method for assessing the buffer rate is in full compliance with the European guidelines.

The data underlying the key indicators used by the Council to assess the level of the countercyclical capital buffer is published after each quarterly meeting of the Systemic Risk Council. In addition to the key indicators, other information is included in the Council's considerations, such as other indicators and policy measures.