The buffer is to be activated when risks in the financial system are increasing. This is typically in periods when consumers and firms take an optimistic view of the economy, house prices are rising and credit conditions are accommodative. The Systemic Risk Council advises that the buffer be activated in a timely manner to ensure that it has been built up if the financial system becomes significantly stressed. That will give the sector a better opportunity to adapt to the requirements than rapid phasing-in would. Furthermore, there is a lag of 12 months from the date when the Minister for Industry, Business and Financial Affairs announces decisions relating to the buffer rate until the changes take effect.
So it is important to have information that provides an early indication that risk is building up. For example, property prices often increase before lending in periods leading up to financial crises. Moreover, the aggregate debt level of Danish households is very high. So although growth in lending is currently limited, build-up of debt from an already high level will amplify risks associated with future credit growth.