Capital conservation buffer

Indian Economy glossary

Also called: CCB · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

The capital conservation buffer (CCB) is extra Common Equity Tier 1 (CET1) capital that banks must hold above the minimum requirement. It was brought in by Basel III. It is set at 2.5% of risk-weighted assets, both under Basel III and in India. The idea is to build a cushion in good times that can be drawn down in stress. A bank can dip into the buffer. But if it does, it faces limits on dividends until the buffer is rebuilt. With the CCB, India's requirements become:

  • CET1 + CCB = 8%
  • Total capital + CCB = 11.5%

Example

A bank has Rs 440 of risk-weighted assets and Rs 50 of capital, so its CRAR = 50 ÷ 440 ≈ 11.4%. That is above the 9% minimum. But it is just below the 11.5% level that includes the CCB. So the bank would face limits on paying dividends.

Don't confuse with

  • Countercyclical capital buffer (CCyB): this ranges from 0-2.5%. It is built up during credit booms and released in downturns. It has not yet been activated in India. The CCB is a fixed buffer that applies all the time.

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