The CCyB is a time-varying capital requirement, which aims to promote a sustainable provision of credit to the economy by making the banking system more resilient to cyclical risks. By increasing regulatory capital requirements in good times, the CCyB looks to ensure additional capital is in place to absorb losses when risks materialise. In the face of losses in times of stress, the release of the CCyB aims to limit the potential that regulatory capital requirements act as an impediment to the supply of credit to the economy.

The CCyB was one element of the global regulatory framework put forward by the Basel Committee on Banking Supervision (BCBS) in the aftermath of the financial crisis of the mid-to-late 2000s. It has been in operation across Europe since 2016 under the Capital Requirements Directive (CRD) IV. In 2019, this was amended by the CRD V, which was transposed into Irish law in 2020 (Statutory Instrument No. 710/2020). In addition to banks, the CCyB applies to MiFID investment firms that are subject to the Capital Requirements Regulation and CRD V.

The Central Bank of Ireland is the authority in Ireland responsible for setting the CCyB. This power was designated to the Central Bank in European Union (Capital Requirements) Regulations 2014 which transposes the CRD IV into Irish law and was amended by European Union (Capital Requirements) (Amendment) Regulations 2020.

In the context of the Single Supervisory Mechanism (SSM) the ECB assesses the CCyB decisions of national designated authorities and if necessary has the power to set a higher rate. As such, the CCyB rate set by the Central Bank is done so having consulted with the ECB.

In general, the CCyB rate will be set between 0% and 2.5% of risk exposures.

However, if justified on the basis of cyclical risk developments, the rate can be set above 2.5%.

The Central Bank’s approach to setting the CCyB is in the context of the Central Bank’s overall macroprudential capital strategy, as outlined in The Central Bank’s Framework for Macroprudential Capital, June 2022.

The Central Bank will use the CCyB as the primary macroprudential buffer to safeguard resilience against macro-financial risks, including those stemming from the small and globalised nature of the Irish economy.  The Central Bank no longer intends to activate the SyRB for this risk.

The Central Bank’s primary objective for the CCyB is to promote resilience in the banking sector to future adverse shocks – in a manner proportionate to the risk environment - with a view to facilitating a sustainable flow of credit to the economy through the macro-financial cycle. In meeting this objective:

• The Central Bank will look to build-up the CCyB rate to 1.5 per cent when risk conditions are deemed to be neither elevated nor subdued.
• Should cyclical risk conditions, as reflected by indicators across credit, the domestic economy, asset prices (including real estate), risk appetite and global conditions reflect emerging imbalances or an elevated risk environment, the buffer rate is expected to be above 1.5 per cent.
• The CCyB rate would be reduced in cases where a materialisation of cyclical systemic risk or a downturn is identified, to a level consistent with mitigating economic risks associated with pro-cyclical bank behaviour during a downturn.

A stylised representation of the Central Banks high level approach to setting the CCyB is illustrated in the chart below:

The Central Bank’s primary objective for the CCyB is to promote resilience in the banking sector to future adverse shocks – in a manner proportionate to the risk environment - with a view to facilitating a sustainable flow of credit to the economy through the macro-financial cycle. The CCyB looks to ensure that banking sector capital requirements take account of the cyclical variations in the macro-financial risk environment. As a small, open economy, the Irish economy is more susceptible to shocks relative to larger, more diversified economies. Setting a positive buffer rate early in the cycle acknowledges this fact as well as the inherent uncertainty in measuring cyclical systemic risk, looking to ensure that an appropriate buffer is available to release as and when required. In addition, by moving early in the cycle, the Central Bank has the scope to implement policy changes in a gradual manner, where necessary and appropriate, with a view to minimising unwanted impacts on the real economy.

There were a number of inputs informing the Central Bank’s chosen approach whereby it would build the CCyB rate to 1.5 per cent when risk conditions are neither elevated not subdued, including:

• An assessment of the macroeconomic benefits and costs of different levels of bank capital for the Irish banking system, at a point in the cycle when risks are neither elevated, nor subdued.
• A macroprudential stress test of the banking system. The positive CCyB rate is not calibrated to ensure the banking sector is resilient to all possible shocks, but rather to a scenario that is appropriate based on the current risk environment. Higher CCyB rates would be implied by the stress testing framework when risk conditions are elevated.
• Lessons-learned from the operation of the macro-prudential capital framework over the past decade, including during the COVID-19 shock, which demonstrated the value of releasable capital buffers to better enable the banking system to support the economy in times of stress.
• Approaches to the setting of the CCyB taken by other jurisdictions, a number of which have adopted a strategy of setting a positive CCyB rate when risks are neither elevated, nor subdued.

The primary objective underlying Central Bank CCyB decisions is promoting banking sector resilience with a view to ensuring a sustainable provision of credit to the real economy. Nonetheless, increasing capital requirements during the upswing of the financial cycle can potentially have a damping effect on the build-up of the cycle itself. Therefore, there may be cases where a potential curtailment of the upswing of the financial cycle arising from CCyB decisions would be viewed by the Central Bank as a positive in curbing the emergence of systemic risk. This could be particularly relevant when risks are elevated and the Central Bank would be setting a buffer above 1.5 per cent. 

However, research on the impact of the CCyB on the upswing in the financial cycle points to the effect being somewhat uncertain and can depend on individual circumstances. As a result, mitigating pro-cyclicality and curbing the downswing of the credit cycle is consistent with banking system resilience being the primary CCyB objective.

Quantitative indicators are used by the Central Bank to monitor macro-financial conditions relating to the setting of the CCyB rate. The broad set of indicators used to inform CCyB decisions covers areas such as:

• Credit developments, including but not limited to the credit gap
• Dynamics in real estate markets
• Macroeconomic variables
• Bank balance sheets
• Global cyclical conditions

These elements have now been supplemented through the development of the macroprudential stress testing framework. This provides a tool which can be used to inform the setting of the CCyB rate applicable to prevailing macro-financial conditions. The approach to using the stress testing model to inform the review of the CCyB rate on an ongoing basis would be through the evolution of the input scenarios. Changes in the trajectory for the economy can be captured through cyclical developments linked to a baseline scenario, while the severity of the adverse scenario would reflect the risk environment (for example greater house price falls in periods of increasingly stretched valuations). While it is not anticipated the stress testing approach would be implemented for each quarterly review, it would be run periodically (e.g. annually, or potentially when a material change to the outlook occurred) to act as an additional input for the Central Bank’s policy stance for the CCyB.

Overall, there is no mechanical link between any specific element and the CCyB rate set with the underlying inputs serving to inform policymaker judgement.

The CCyB rate is reviewed by the Central Bank every quarter.

The outcome of each review is published on the Central Bank’s website.

No.

Where the Central Bank announces an increase in the CCyB rate, a phase-in period applies before the higher rate becomes effective. The phase-in period will generally be 12 months although a shorter period can be applied if appropriately justified.

However, where the CCyB rate is released or reduced the lower rate comes into effect immediately.

Yes, the Central Bank calculates and publishes the credit gap every quarter as part of its review of the CCyB rate.

The credit gap was given a prominent, although not dominant, role in the CCyB framework due to research showing it was the best single leading indicator of systemic banking crises. See Drehmann et. al 2010 (PDF).

However, the standardised credit gap can have some undesirable properties and may therefore not be applicable in all countries and at all times. These shortcomings can arise from both the data employed and/or the statistical approach used.

One of the emerging lessons in Europe from the operation of the CCyB to date is the view that the role of the credit gap in informing rate decisions should be only one element of a much broader assessment of cyclical risk conditions – see for example views expressed by the ECB and ESRB.

Given the structure and idiosyncrasies of the Irish economy, the standard credit gap metrics are of limited policy applicability. The Central Bank also continues to investigate and assess alternative methodologies which may provide more meaningful and intuitive estimates for the credit cycle in Ireland – see, for example, O’ Brien, O’ Brien and Velasco (2018) and O’ Brien, O’ Brien and Velasco (2018).

In its role as designated authority the Central Bank sets the CCyB rate applicable to the Irish credit exposures of institutions. Similarly, other designated authorities set the CCyB rate applicable to exposures within their respective jurisdictions.

The buffer rate for each individual institution, known as the institution specific capital buffer rate, is the exposure-weighted average of the CCyB rates that apply in the jurisdictions in which the institution has relevant credit exposures. This institution specific CCyB rate is then applied to a firms total risk-weighted assets to determine the € amount of its institution specific countercyclical capital buffer.

Stylised example of institution specific CCyB

Credit Exposures	CCyB Rate Country A	CCyB Rate Country B	Institution Specific CCyB Rate	Total Risk-weighted assets	Institution specific CCyB
Bank 1	Country A: 100% Country B: 0%	1%	0.5%	1%	€100bn	€1.0bn
Bank 2	Country A: 50% Country B: 50%	1%	0.5%	0.75%	€100bn	€0.75bn

Given the highly integrated nature of the EU financial sector, reciprocity is an essential element of the macro-prudential framework. Reciprocity aims to increase the effectiveness of macro-prudential measures by reducing cross-border leakages and by minimising negative cross-border effects.

Under CRD IV, CCyB rates set between 0% and 2.5% are subject to mandatory reciprocity. As such CCyB rates set within the EU apply to banks authorised in all Member States with relevant credit exposures and not just the banks authorised in the Member State in question.

Rates in excess of 2.5% are subject to voluntary reciprocity among EU Member States, although the ESRB has recommended full reciprocation in all cases.

The ESRB is responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. In pursuit of its macro-prudential mandate, the ESRB monitors and assesses systemic risks and, where appropriate, issues warnings and recommendations. Recommendation 2014/1 provides guidance on the setting of countercyclical capital buffer rates.

A list of CCyB rates effective in other European countries is available on the ESRBs website.

Following each CCyB rate change, the Central Bank notifies the ESRB of its decision.

Yes. The CCyB is one of a number of macroprudential policies that the Central Bank uses to promote financial stability in Ireland. View more information on the Central Banks macroprudential policies.