![]() ![]() I am not suggesting that this would solve the problem of financial crisis. ![]() There are no absolutes when we deal with what happens under stress but I believe a Cyclical Buffer such as is outlined in this post also has the potential to help mitigate the risk of loss of confidence in the bank when losses are no longer part of what stakeholders expect but have moved into the domain of uncertainty. The value of this Cyclical Buffer proposal ultimately depends on its capacity to enhance the resilience of the capital adequacy regime in the face of economic downturns without compromising its risk sensitivity. The need for greater clarity in the distinction between expected and unexpected loss perhaps less so. The value of improved clarity, coherence and consistency in the risk appetite settings is I think reasonably self evident. a mechanism that reduces both the pro cyclicality of a risk sensitive capital regime and the tendency for the transition to unexpected losses to trigger a loss of confidence in the bank.a means of more clearly defining the point where losses transition from expected to unexpected and.an intuitive connection between a bank’s aggregate risk appetite and its target capital structure.My objective is to illustrate the ways in which incorporating a Cyclical Buffer in the target capital structure offers: The example I have used to illustrate the idea is calibrated to absorb the expected impact of an economic downturn that is severe but not necessarily a financial crisis style event. The size of the buffer is a risk appetite choice each individual bank must make. This post sets out a case for incorporating a discretionary Cyclical Buffer (CyB) into a bank’s Internal Capital Adequacy Assessment Process (ICAAP). Cyclical capital buffers have a role to play in managing bank capital but not the kind the BCBS has formally developed under Basel III. ![]()
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