Context:
RBI has decided not to activate the CCyB.
Countercyclical Capital Buffer (CCyB):
- A regulatory measure requiring banks to hold additional capital during periods of excessive credit growth.
- Aims to protect the banking sector from potential losses due to cyclical systemic risks.
- Objectives –
- Ensure financial stability by building a buffer during economic booms.
- Allow banks to use this buffer during economic downturns to maintain credit flow.
- Key Features –
- Part of the Basel III norms introduced after the 2008 financial crisis.
- The buffer is activated based on indicators like the credit-to-GDP gap.
- It is a percentage of a bank’s risk-weighted assets, varying across jurisdictions.
- Implementation in India – The Reserve Bank of India (RBI) introduced the CCyB framework in 2015, but never used so far.
- Significance –
- Prevents excessive lending during economic booms.
- Enhances the resilience of banks during financial stress.
- Promotes sustainable economic growth by mitigating systemic risks.
Source: ET
Previous Year Question
Consider the following statements:
1. Tight monetary policy of US Federal Reserve could lead to capital flight.
2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
3. Devaluation of domestic currency decreases the currency risk associated with ECBS.
Which of the statements given above are correct?
[UPSC Civil Service Exam – 2022 Prelims]
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a)
Explanation:
Statement 3 is incorrect: Devaluation of domestic currency does not affect the External Commercial Borrowings as it is denominated in the foreign currency and not in the domestic currency.