Economics • Banking & FinanceHard
What does 'Countercyclical Capital Buffer (CCyB)' require banks to do under macroprudential regulations?
A. Accumulate extra capital during periods of high credit growth to absorb potential losses during economic downturns.✓ Correct Answer
B. Reduce lending rates automatically when inflation exceeds the upper tolerance band.
C. Maintain higher cash reserves only during times of severe banking panics.
D. Write off non-performing assets within ninety days of default.
💡 Solution & Explanation
The Countercyclical Capital Buffer is designed to protect the banking sector from systemic risks by building up capital buffers during economic booms that can be drawn down during recessions. Alternative options suggesting automatic cuts in lending rates during high inflation confuse macroprudential capital rules with monetary policy instruments. This regulatory tool aligns with Basel III capital adequacy guidelines adopted by the Reserve Bank of India.
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