The buffer should be built up when risks in the financial system are rising. This typically happens during periods when households and companies are optimistic about the economy; when house prices are increasing; and credit standards are lenient. The Systemic Risk Council continuously assesses developments and sets the buffer rate accordingly.
The Council recommends that the buffer be built up well before considerable stress occurs in the financial system. A timely build-up of the buffer enables the financial sector to adapt to the requirements. An early build-up of the buffer is also essential because a period of 12 months passes from when the Minister for Industry, Business and Financial Affairs publishes buffer rate decisions and until the changes take effect.
Information that provides an early indication of risk build-up is consequently important. For instance, property prices tend to increase before lending in the run-up to financial crises. Moreover, the total debt of Danish households is currently at a very high level. So, while credit growth is currently low, debt accumulation from an already high level will amplify the risks associated with future credit growth.