Cebs calls for varying capital buffer rules

Reform of the Basel II capital adequacy rules should include a varying capital buffer to compensate for losses and smooth out the effects of the business cycle, European regulators said on Friday.

A position paper from the Committee of European Banking Supervisors (Cebs) said the buffer's size should depend on the riskiness of the bank's portfolio, expressed as a probability of default (PD) either at portfolio or asset level.

The calculation would compare the current PD with the highest PD in a certain period of history - typically during a recession - and set the minimum capital level accordingly. During a downturn, as the current PD rose close to recession levels, the buffer would be allowed to shrink, and would build up again as the economy expanded and PD fell further below the recessionary PD.

Cebs called earlier this month for financial institutions to hold enough liquid assets to survive at least a month of liquidity stress. The new guidelines are intended as a medium-term measure, to provide a prudential safeguard until a new set of Pillar 1 regulatory capital rules can be drawn up - which Cebs says could take several years. It warned its latest proposal was not intended to shield banks against extreme events, and banks should continue to conduct their own stress tests.

Cebs said it had consulted with banks, who favoured the portfolio-level capital measure on the basis that, although it was less precise, it would have the same countercyclical effect and would be far easier to calculate.

See also: Cebs publishes guidelines on liquidity buffers
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