- **Countercyclical buffer decisions** . The countercyclical capital framework is a stellar enhancement in Basel III; it crystallizes the BCBS effort to introduce a macroprudential layer in banking sector regulation. In particular, this mechanism attempts to make banking sector less pro-cyclical, and is composed of two elements. First, a _capital conservation buffer_ to ensure banks hold a capital reservoir that can be used to absorb losses during periods of stress while still being above the minimum capital requirements. This buffer, set at 2.5% of banks’ risk weighted assets (RWAs), will require profit retention in banks with capital ratios that do not meet this excess capital. The second element, the _countercyclical capital buffer_ , has been engineered to address junctures of excess – and potentially destabilizing – credit growth. In practice, it amplifies the _conservation buffer_ , leading banks to increase their capital ratios and lean against the build-up phase of the credit cycle.<sup>32</sup>

The countercyclical buffer will, in a given jurisdiction, be zero most of the times. Local authorities (e.g. the banking sector supervisor) will “activate” this add-on, and hence expand the conservation buffer when they judge there is potential evidence of a destabilizing trend in credit growth. The BCBS envisages a common reference guide – based on the deviations in credit-to-GDP from its trend – to aid supervisors in their judgment. But it also recognizes that they may inform their decisions with further variables which can be useful indicators of rising tensions in the credit market. Some of these include interest rates, collateral valuations, delinquency rates and other variables commonly encountered in complete PCRs. For example, to the extent that PCRs have information about credits origination date, a simple _vintage analysis_<sup>_33_</sup> can indicate if credits that have recently been granted are displaying an abnormally high delinquency rate. This, for example, could lead to conclude the convenience of activating the countercyclical add-on.

- **Evaluation of systemic importance** . Recognizing that the macroprudential approach has also an important cross-section aspect, Basel III will also include particular – more stringent – provisions for Systemically Important Financial Institutions (SIFIs). A precondition for such a framework is counting with sound elements for their identification.

PCRs can provide a valuable input for measuring the degree of systemic importance of banks that, as a result of their size, inter-linkages or lack of substitutability, must be more conservatively regulated and intensively supervised. Examples include banks that are the unique creditors of certain geographic regions or business sectors, or are extensively interconnected with other financial institutions.

> 32 For a thorough explanation of the mechanics of the countercyclical capital framework, see BCBS (2010b).

> 33 _Vintage analysis_ partitions the credit portfolio by date of origination and compares the evolution of the respective cumulative delinquency rates – i.e. _delinquency maturation curves_ –. The steeper a curve is towards delinquency, the riskier the vintage is. If recent vintages display a steeper pattern, they can be indicating deterioration in lending standards or in the credit environment. This kind of analysis is typically used as a portfolio management tool in the banking industry, but should also be used by bank supervisors and can be readily performed with PCR data.

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