The institution-specific rate is a weighted average. The weights follow risk-weighted assets, not lending, and the result applies to the whole risk exposure amount.
A bank's institution-specific countercyclical buffer rate is the weighted average of the buffer rates set in each country where its relevant credit exposures sit, weighted by the own funds requirements for credit risk on those exposures, not by the exposures themselves. The rate is then applied to the bank's total risk exposure amount. For an illustrative bank lending in five countries the rate is 1.0493 per cent, a buffer of 377.7 million on 36,000 million of risk-weighted assets. Weighting by exposure gives 1.1000 per cent and 18.3 million more.
Worked in full in Financial Regulation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The bank is illustrative, in millions of euros. The country rates are illustrative too: real rates change, are announced in advance and usually apply twelve months after the decision, so take them from each designated authority on the date of calculation.
| Country | Exposure | Credit RWA | RWA density | CCyB rate |
|---|---|---|---|---|
| Home market | 40,000 | 14,000 | 35% | 1.00% |
| Country B | 8,000 | 6,400 | 80% | 2.00% |
| Country C | 6,000 | 4,800 | 80% | 0.00% |
| Country D | 4,000 | 1,200 | 30% | 2.50% |
| Country E (no rate set) | 2,000 | 2,000 | 100% | 0.00% |
| Relevant credit exposures | 60,000 | 28,400 |
Relevant exposures are private-sector credit exposures: loans to households and companies, and debt in the trading book. Exposures to central governments, central banks, public bodies and other banks are out. The bank's total risk exposure amount, 36,000 million, also includes operational and market risk and the excluded exposures.
The weight is each country's share of the own funds requirement for credit risk on relevant exposures. For credit risk that requirement is 8 per cent of the risk-weighted amount, so the 8 per cent cancels and the weights are the shares of credit RWA.
Own funds requirementi = 8% × credit RWAi; home market: 8% × 14,000 = 1,120
Weighti = OFRi / Σ OFR = 1,120 / 2,272 = 49.30%
| Country | OFR | Weight | Rate | Contribution | Exposure weight |
|---|---|---|---|---|---|
| Home market | 1,120 | 49.30% | 1.00% | 0.4930% | 66.67% |
| Country B | 512 | 22.54% | 2.00% | 0.4507% | 13.33% |
| Country C | 384 | 16.90% | 0.00% | 0.0000% | 10.00% |
| Country D | 96 | 4.23% | 2.50% | 0.1056% | 6.67% |
| Country E | 160 | 7.04% | 0.00% | 0.0000% | 3.33% |
| Total | 2,272 | 100% | 1.0493% | 100% |
CCyB rate = Σ weighti × ratei = 1.0493%
CCyB amount = 1.0493% × total risk exposure amount 36,000 = 377.7 million of CET1
Excel: =SUMPRODUCT(CreditRWA,Rate)/SUM(CreditRWA)*TotalRWA
The home market holds two thirds of the exposures but only 49.30 per cent of the weight, because its mortgage-heavy book runs at a 35 per cent density. Country B's corporate loans, at 80 per cent, carry 22.54 per cent of the weight on 13.33 per cent of the exposures. The buffer follows the capital, not the balance sheet.
Each country's rate moves the bank's rate by its weight. If the home authority raises its rate from 1.00 to 1.50 per cent, the bank's rate goes to 1.2958 per cent and the buffer to 466.5 million, 88.7 million more. Where new lending goes matters as much, because it changes the weights.
| Where the 4,000 is lent | CCyB rate |
|---|---|
| Base case | 1.0493% |
| Home market (35%, 1.00%) | 1.0470% |
| Country B (80%, 2.00%) | 1.1456% |
| Country D (30%, 2.50%) | 1.1081% |
| Country E (100%, no rate) | 0.9198% |
Lending into a country with no rate lowers the bank's rate, but not its requirement in euros by as much as it looks: the new loans also add to the total risk exposure amount the rate is applied to. A treasurer comparing two growth plans has to recompute both the rate and the base.
The countercyclical buffer is one layer of the combined buffer that sets the distribution trigger; the restriction that follows a breach is worked in how to calculate the maximum distributable amount, and the headroom it leaves in whether an additional tier 1 shortfall cuts headroom.
The buffer rebuilt country by country, with the trigger and its quartiles, is live in the free workbook for this book.
By own funds requirements for credit risk on relevant exposures, which for credit risk is 8 per cent of risk-weighted assets, so in practice by credit RWA. In the illustrative case a home market with two thirds of the lending but a 35 per cent density gets a weight of 49.30 per cent, and the bank's rate is 1.0493 per cent instead of the 1.1000 exposure weighting gives.
Relevant credit exposures to the private sector: households, companies and trading-book debt. Exposures to governments, central banks, public bodies and banks are excluded from the weights. The rate is still applied to the whole risk exposure amount: 1.0493 per cent of 36,000 million is 377.7 million, while applying it to the 28,400 of relevant RWA alone would understate the buffer by 79.7 million.
By the rate change times that country's weight. If the home market, with a 49.30 per cent weight, moves from 1.00 to 1.50 per cent, the bank's rate rises from 1.0493 to 1.2958 per cent and its buffer from 377.7 to 466.5 million, 88.7 million more of CET1 to hold once the increase takes effect.
This article is one calculation from Financial Regulation. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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