The Countercyclical Capital Buffer (CCyB), which is part of the combined buffer requirements, aims to increase the stability and resilience of the financial intermediary system over credit cycles, or in other words, to counteract the procyclicality of the financial system. When cyclical financial system risk increases, institutions need to accumulate capital to build up capital buffers that strengthen the resilience of the banking sector during periods of stress when losses materialise. This helps to maintain the supply of credit in the economy and dampen the downturn in the financial cycle. The countercyclical capital buffer can also help to contain excessive credit growth during a boom in the financial cycle.
The operation of the positive neutral approach of the countercyclical capital buffer framework
Source: MNB
The MNB introduced the framework on 1 January 2016, in line with the legal requirements of The Single Rulebook (CRR, CRD), the MNB Act (available in Hungarian), the Hpt. (available in Hungarian) and the Bszt., as well as the European Systemic Risk Board (ESRB) Macroprudential Handbook and its Recommendations 2014/1 and 2015/1.
The framework consists of three interrelated elements to ensure consistent application of the instrument across the EEA:
- The MNB determines the applicable countercyclical capital buffer rate for domestic exposures, taking into account the benchmark countercyclical capital buffer rate (buffer guide) depending on the state of the lending cycle and the cyclical system risks resulting from overheated lending, the positive neutral countercyclical buffer rate (PNR CCyB) required in a neutral risk environment (1 percent) and any other factors. The MNB reviews the development of cyclical systemic risks and adjust countercyclical capital buffer rate accordingly on a quarterly basis if warranted.
- The countercyclical capital buffer rates set by the responsible authorities of EEA countries apply to the domestic banking system's exposures to EEA countries up to a mandatory capital buffer rate of 2.5 percent, and voluntary reciprocity above this rate.
- In the context of the application of the countercyclical capital buffer, the ESRB's relevant guidelines require Member States to identify, in the second quarter of each year, the countries that are significant for the domestic financial system because of exposures to counterparties in these countries. The identification of significant third countries is important not only because these countries have or could have a material impact on the countercyclical capital buffer of domestic financial institutions, but also because of the monitoring and, where necessary, rate-setting obligations of Member States in respect of these countries in the form of an MNB regulation and reporting and consultation obligations towards the ESRB.
In June 2024, the MNB joining to the spreading European practice has decided on the domestic application of the so-called positive neutral framework and, accordingly, on the renewal of the strategy and methodology for the countercyclical capital buffer.
According to the modified framework, the MNB determined a positive neutral rate of 1 percent in a neutral risk environment that is not yet characterized by excessive cyclical risk, which functions as a minimum expectation in periods outside of crisis situations from July 1, 2025. The MNB may establish a requirement of more than 1 percent depending on the development of cyclical systemic risks during the quarterly rate decisions, so that the higher of the rate reflecting cyclical systemic risks and the positive neutral rate of 1 percent becomes applicable. In a possible stress situation, the MNB decides on the need to release the entire prescribed capital buffer. With the introduction of the new framework, the banking sector can, apart from crisis situations, have a capital buffer of at least 1 percent of the domestic exposure values, which can be released in a crisis, regardless of the state of the financial cycle.
The MNB shall review the countercyclical capital buffer rate applicable to domestic exposures on a quarterly basis, in line with the EEA countries' review of the capital buffer rate applicable to exposures in other EEA countries, and once a year for third countries that are significant for the domestic banking system.