European Systemic Risk Board and European Central Bank publish report on early-cycle positive neutral countercyclical capital buffer use across 17 EEA countries

The European Central Bank and the European Systemic Risk Board published a joint report on the use of “positive neutral” approaches to setting the countercyclical capital buffer (CCyB) early in the financial cycle, when cyclical systemic risks are neither subdued nor elevated. The report documents the experiences of European Economic Area authorities that have adopted this approach and the views of those that have not, with 17 EEA countries identified as having adopted a positive neutral CCyB approach. The report describes motivations for adoption, including building up releasable buffers in a timely manner amid uncertainty in risk identification, enabling a more gradual build-up, and increasing the stock of releasable buffers to support resilience to a wider range of potentially large shocks. It highlights three common design features: the approach is framed as earlier activation of the existing CCyB rather than a new buffer; it is generally not expected to result in higher CCyB requirements at the peak of the cycle; and it typically does not require offsets via lower requirements elsewhere, consistent with the risk-based nature of the CCyB. The report also flags challenges to implementation, including the need for clearer objectives to avoid overlaps with other tools such as the systemic risk buffer, and perceived legal uncertainty in EU legislation, with a suggested avenue of clarifying the European macroprudential framework to allow more flexible and proactive CCyB use, including reducing the prominence of the credit-to-GDP gap and other credit indicators in guiding CCyB settings.