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Implementing countercyclical capital buffer schemes for Australian banks

Issue 3 (2014)

Abstract: As part of the Basel III reforms, a countercyclical capital buffer (CCB) scheme requires banks to build up equity capital during periods of high credit growth against potential losses in subsequent economic downturns. According to Basel III, the extent of the deviations of the credit-to-GDP ratio from its long‑term trend is a good indicator of the need to build up a capital buffer two to five years prior to a crisis. Based on a sample period from 1976 to 2011 during which two financial crises occurred, we show that Australian banks should begin accumulating their capital buffers when the credit-to-GDP ratio exceeds its long-term trend. The capital buffers should increase linearly to a maximum of 2.5 per cent of risk-weighted assets when the credit-to-GDP ratio is 8 per cent or above its long-term trend. Under this particular scheme, Australian banks would have four years to accumulate their capital buffers at the beginning of a financial crisis.

To cite this article: Huang, Po-Hsiang; Lee, Shih-Cheng and Lin, Chien-Ting. Implementing countercyclical capital buffer schemes for Australian banks [online]. JASSA, No. 3, 2014: 12-18. Availability: <;dn=795861284520442;res=IELBUS> ISSN: 0313-5934. [cited 26 Jul 17].

Personal Author: Huang, Po-Hsiang; Lee, Shih-Cheng; Lin, Chien-Ting; Source: JASSA, No. 3, 2014: 12-18 DOI: Document Type: Journal Article ISSN: 0313-5934 Subject: Bank capital; Credit; Gross domestic product; Peer Reviewed: Yes

Database: Business Collection