Economics • Banking & FinanceHard
What is the primary purpose of the 'Countercyclical Capital Buffer (CCyB)' framework established for commercial banks under Basel III norms?
A. To require banks to accumulate capital during periods of high economic growth that can be drawn down during periods of stress.✓ Correct Answer
B. To set a mandatory minimum limit on holdings of government securities during high inflation periods.
C. To insure retail depositor accounts against systemic banking failures.
D. To regulate foreign exchange swap transactions executed by scheduled banks.
💡 Solution & Explanation
The Countercyclical Capital Buffer requires banks to accumulate extra common equity capital during periods of excessive credit growth, which can then be drawn down during economic downturns to absorb potential losses. This buffer prevents the banking sector from amplifying macroeconomic swings. Deposit insurance and statutory reserve ratios serve entirely different regulatory functions under central banking.
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