Economic Letter: Motivating the use of different Macro-prudential instruments: The Countercyclical Capital Buffer vs. Borrower-Based Measures

An Economic Letter by Eoin O’Brien and Ellen Ryan considers the policy choices facing central banks when deciding how best to mitigate systemic risks. The research examines the use of the countercyclical capital buffer (CCyB) and borrower-based measures both in Ireland and across Europe in preventing excessive credit growth and leverage.

The key findings are:

• The CCyB is designed to be a broad measure, affecting exposures across asset classes and does not provide a targeted means of dealing with credit developments at a sectoral level. On the other hand, borrower-based measures provide policymakers with a tool which directly impacts on the flow of credit and allows for the direct targeting of household sector resilience.
• While the CCyB has been operational across Europe since 2016, the number of countries where a non-zero rate has been implemented remains relatively small, although this figure is growing.
• The CCyB is generally seen as being best suited, although not limited to, enhancing the resilience of the banking system. Borrower-based measures provide a tool that can be used to target the resilience of households or impact directly on the flow of mortgage lending.
• In practice, macro-prudential authorities are likely to employ a combination of measures, especially when cyclical systemic risks are elevated, in order to achieve an appropriate macro-prudential policy stance overall.

The views presented in Economic Letters are those of the authors and do not necessarily represent the official views of the Central Bank of Ireland.

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