Guidance on the countercyclical capital buffer


Guidance on the countercyclical capital buffer

14 December 2015

Regulatory News Alert

Countercyclical capital buffer (limiting procyclicality)

More Capital to Counter System-Wide Risk

In the aftermath of the financial crisis, the Basel Committee on Banking Supervision (BCBS) published a new set of capital and liquidity standards aiming to strengthen the banking sector’s resistance and resilience to economic and financial shocks. As part of these new standards, the Basel III regulatory capital framework introduced the Countercyclical Capital Buffer (CCyB).

Binding as from 2016, the CCyB will aim to achieve the broader macro prudential goal of protecting the banking sector during periods of excessive credit growth by maintaining a sufficient capital base to absorb losses in stressed periods.

The Commission de Surveillance du Secteur Financier (CSSF) is responsible to assess the Luxembourgish domestic buffer rate by relying on the monitoring of indicators that may signal a build-up of system-wide risk, such as credit-to-GDP. A CCyB ranging from 0.0% to 2.5% of risk-weighted assets - or higher under specific conditions - will be implemented from 2016 onwards.

The CCyB regime will be fully applicable in Luxembourg as from 1st January 2016 onwards through the CSSF Regulation 15-01. However, the rate applicable to relevant credit exposures located in Luxembourg is set to 0.0% by the CSSF Regulation 15-04. The CCyB is applicable to all Luxembourg CRR institutions, Luxembourg branches of third country institutions and CRR investment firms not considered as SME. CSSF Regulation 15-05 indeed exempts the application of the CCyB to investment firms qualifying as SME, i.e. investment firms with a total of employees of less than 250, and with a total annual turnover not exceeding EUR 50 million and/or with a total annual balance sheet not exceeding EUR 43 million.

Regulatory Requirements

The CCyB should reflect the location of residence of the ultimate obligor of the institution’s portfolio of relevant credit exposures, which include credit risk exposures, exposures held in the trading book and securitisation excluding governments and institutions obligors. As a result, CRR institutions which have exposures to counterparties in more than one jurisdiction compute their institution-specific CCyB by applying the CCyB applicable in the country of location of these exposures. For exposures located in non-EEA (outside the 28 states within the European Economic Area) and non-BCBS countries, the CCyB rate is set to zero in the absence of any CSSF specific decision.

Internationally active CRR institutions will need to analyse the geographical location of their relevant credit exposures and then calculate their specific CCyB requirement as a weighted average of the CCyB requirement which is applied in each jurisdiction of location of relevant credit exposures. The weighting applied to the buffer in place in each jurisdiction will be calculated as the institution’s total credit risk charge that relates to relevant credit exposures in that jurisdiction divided by the total credit risk charge arising from relevant credit exposures across all jurisdictions.

Specific calculation rules*

Investment in CIU units or securitisation

The geographical location of relevant exposures shall be recognised either at the level of underlying assets or at the level of the most representative location in underlying assets. If this identification cannot be performed without disproportionate efforts, allocation to the home Member State.

Facility granted to CIU (fund)

Recognised as a relevant exposure (i.e. corporate exposure class under the standardised approach), the geographical location is the country of establishment of the CIU.

Collateralised or guaranteed loans

The ultimate obligor is the collateral issuer or guarantee provider for the recognition of the geographical location of the exposure.

Specialised lending exposure

The geographical location to be recognised is the country of location of the asset generating the income that is the primary source of repayment of the exposure.

Other items

Exposures in the ‘other items’ exposure class under the standardised approach whose obligors cannot be identified are allocated to the home Member State.

Banking book foreign exposures

These exposures may be allocated to the home Member State if they account for 2% or less of the aggregate value of relevant exposures.

Trading book foreign exposures

These exposures may be allocated to the home Member State if they account for 2% or less of the aggregate value of relevant exposures.

* Technical instructions on the identification of the geographical location of relevant exposures may be found in Regulation (EU) N° 1152/2014.

CRR institutions will be required to calculate and publically disclose - in the so-called “Pillar III report” -the key elements of the calculation of the CCyB, in particular the geographical distribution of their relevant credit exposures, the respective CCyB rates applicable to the relevant credit exposures, their institution-specific CCyB rate and the final amount of CCyB.

In practice, the CCyB rate applies 12 months after the publication by the CSSF of the CCyB rate for Luxembourg, and by the relevant authorities for other countries, or less than 12 months after the publication if justified on the basis of exceptional circumstances. By derogation, any CCyB rate reduction by the CSSF and other relevant authorities applies immediately.

Further details, relevant information and binding CCyB rates can be found at:

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