Context: The Reserve Bank of India, in its review of requirement of counter-cyclical capital buffer on Tuesday said it has decided against activating countercyclical capital buffer (CCyB) as it is not needed in the present circumstances. 

Meaning of the context: Counter-Cyclical Capital Buffer (CCyB) is a macroprudential tool mandated under the Basel III framework to enhance the resilience of banks during economic cycles.

Learning Zone:

• CCyB is an additional capital buffer (0-2.5% of risk-weighted assets) that banks must hold during periods of excessive credit growth to prevent systemic risks.
• It aims to:
  • Strengthen banks against potential losses during economic downturns.
  • Moderate credit booms to prevent asset bubbles.
• Mechanism:
  • Activation: RBI activates CCyB when credit growth (e.g., high credit-to-GDP gap) signals systemic risk, requiring banks to build capital reserves.
  • Deactivation: During downturns, RBI reduces or removes CCyB, freeing capital to support lending and economic recovery.
  • Capital is held as Common Equity Tier 1 (CET1), ensuring high-quality reserves.

Source : Business Standard