About the countercyclical capital buffer
The countercyclical capital buffer was introduced into international regulation after the financial crisis as part of a larger set of reforms to make the financial sector more robust. The purpose of the countercyclical buffer is to reduce the downturn in the real economy that would otherwise follow if households and companies access to credit are tightened inadequately during periods of stress in the financial system.
The buffer shall be built in periods when risks in the financial system build up. This will typically be in periods of optimism, low risk perception, rising asset prices and lenient credit terms, such as was the case in the years leading up to the financial crisis. The goal is that the buffer is built up before risks materialise, for example, before the financial system is exposed to a negative shock. In periods of financial stress, the buffer is released and the institutions can use the released capital to maintain adequate credit.
The Systemic Risk Council is responsible for identifying and monitoring systemic financial risks in Denmark. In order to reduce or prevent the development of such risks, the Council may, among other measures, make recommendations on actions in the financial sector. A concrete measure that the Council may recommend is the use of the countercyclical capital buffer.
The Systemic Risk Council assesses quarterly the level of the buffer rate. In case of changes to the buffer rate, the Council will publish a recommendation addressed to the Minister for Industry, Business and Financial Affairs. It is the minister who is responsible for the quarterly fixing of the buffer rate in Denmark.
In 2017, the Council has revised its method to assess the buffer rate. The previous method was initially published in 2014. The revision draws on the Council's as well as other countries' experience with assessing the countercyclical buffer rate in the past three years. The Council will continue to develop the method as further experience is gained.
Data from the main indicators, as considered by the Council in its assessment of the buffer rate, are published quarterly after the Council meeting. In addition to the main indicators, the Council also includes other information in its considerations, including other indicators and other policy measures.