RBI:Credit-to-GDP gap alone won't cover countercyclical buffer

The Reserve Bank today said the credit-to-GDP gap will not be the only reference point in the countercyclical capital buffer (CCCB) framework for banks.
The central bank, while releasing the report of the internal working group (IWG) on implementation of countercyclical capital buffer (CCCB), said, "While the credit-to-GDP gap shall be used for empirical analysis to facilitate CCCB decision, it may not be the only reference point in the CCCB framework for banks".
Countercyclical capital buffer refers to the mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements. This was imposed on banks as a measure of solvency by the Basel III regulations following the 2008 global credit crisis.

Under the Basel III norms, the gap between credit-to-GDP ratio and its long-term trend is considered as a guide for setting countercyclical capital buffers and is aimed at strengthening banks' defences against the build-up of systemic vulnerabilities.
The working group was set up under the chairmanship of its executive director B Mahapatra to create a CCCB framework for banks and the draft report was placed on the RBI's website on December 2, 2013 for comments.
The RBI today said credit-to-GDP gap may be used in conjunction with other indicators like gross non-performing assets growth for arriving at CCCB decision.

The lower threshold where the CCCB is activated may be set at 3 percentage points of the credit-to-GDP gap, provided its relationship with gross NPAs remains significant and the upper threshold where the CCCB is at its maximum may be kept at 15 percentage points of credit-to-GDP gap, the report said.

The group recommended that the CCCB shall increase gradually from 0 to 2.5 percent of the risk weighted assets of a bank but the rate of increase would be different based on the level/position of credit-to-GDP gap between 3 and 15 percentage points.
It said the RBI may apply discretion in using the indicators while activating or adjusting the buffer.
"The CCCB framework may be operated in conjunction with sectoral approach that has been successfully used over the period of time," the report said.
The framework may be maintained in the form of common equity Tier I capital only, the group has recommended. It also suggested that for all banks, the CCCB shall be maintained on solo basis as well as on consolidated basis.