FI’s approach to setting the countercyclical capital buffer

In the memorandum Tillämpning av den kontracykliska kapitalbufferten, Finansinspektionen (FI) describes the general principles that serve as a basis for how the authority's sets the buffer rate for the countercyclical capital buffer. The countercyclical capital buffer is a buffer requirement that is intended to vary over time. The buffer should be built up when circumstances allow so that it can be lowered – for example in financial crises – to create a larger margin to other decided capital requirements. A larger margin creates better possibilities for banks to lend to non-financial firms and households during a crisis and in this way maintain the supply of credit.

One of the lessons learned from last year's sharp downturn in the economy and the turbulence on the financial markets is the importance of usable capital buffers that can be lowered to lighten the requirements on the banks. As a rule, crises are difficult to predict, and last year's developments are a good example of this. In Sweden, we entered the crisis with a high countercyclical buffer, which FI was able to lower and free up capital for the banks. Not all countries had built up the buffer and were thus not able to free up capital for banks to maintain the supply of credit.

To ensure the possibility of freeing up capital for Swedish banks during a crisis, FI will apply a positive neutral rate of 2 per cent going forward.

"This means that we will aim to hold the buffer rate at 2 per cent during normal periods, i.e. even when we make the assessment that the credit supply is not associated with elevated systemic risks. This creates a greater opportunity to lower the buffer rate after an unexpected shock," says FI's Director General Erik Thedéen.

But the neutral level does not mean that the requirement will be higher under all circumstances; only when the credit supply is not associated with elevated systemic risks. FI will only raise the buffer above the neutral rate, when systemic risks are so elevated as to motivate a higher buffer rate than two percent.

The current capital buffer rate is 0 per cent. It will remain at zero until at least Q3 2021. Even if we are no longer experiencing the situation that caused the decrease, it continues to be important for banks to have sufficient capacity to lend to firms and households as the economy gradually recovers from the sharp economic downturn in the spring of 2020.