The Countercyclical Capital Buffer (CCyB) functions as an additional buffer to anticipate losses caused by excessive credit growth with the potential to disrupt financial system stability.
The risks are associated with procyclical lending in the banking industry, where banks tend to increase lending during an expansionary economic boom period and restrict lending during a contractionary economic bust period. Procyclicality in Indonesia necessitated CCyB implementation, as evidenced by the direct correlation between credit growth and economic growth.
The additional capital buffer that must be maintained by banks during an expansionary period may be used when the banks experience pressures during an economic contraction, thus maintaining continuity of the bank intermediation function. The CCyB is dynamic within a 0-2.5% range of risk-weighted assets (RWA) in the banking industry. Therefore, Bank Indonesia evaluates the level of CCyB no less than once every six months.
In general, Bank Indonesia will increase the CCyB during an economic boom and decrease the level during an economic contraction. CCyB policy is inextricably linked to bank capital regulations issued by the Indonesian Financial Services Authority (OJK) and is expected to strengthen the resilience of the banking industry.
