Banks Countercyclical Capital Buffer: Calculation Procedure and its Implementation in the Russian Banking Sector

Banks countercyclical capital buffer is a new tool in the bank capital management, announced in the international agreement Basel III; it is aimed at curbing excessive credit growth during the period of economic upturn. This paper is devoted to identifying the most appropriate indicators for activating the countercyclical capital buffer in the Russian banking sector. The author uses aggregated data in the 2004 to 2015 period provided by Bank of Russia. Evaluation of macroeconomic indicators is based on the methodology proposed by the Basel Committee on Banking Supervision. The key idea of this method is to calculate the deviation of actual values from its long-term trend, identified by the Hodrick-Prescott filter. The Baxter-King filter that is the modification of the Hodrick-Prescott filter is also applied in the study. Exceeding the deviation over the critical value indicates the need for additional requirements for core capital adequacy. Econometric model built by the method of least squares is used in order to identify the relationship between banking indicators and the countercyclical capital buffer. The results show that the ratio of total loans to GDP and the growth rate of the total loan portfolio are the most appropriate indicators for evaluation the feasibility of introducing the countercyclical capital buffer in Russia. The dynamics of these indicators suggests that the activation of countercyclical buffer was necessary in 2006, 2011 and 2014. The share of nonperforming loans in total loans became the most important banking indicator. These findings play an important role in deciding on capital requirements for banks. However, the key feature of the countercyclical capital buffer is the necessity to organize a qualitative analysis of the banking sector, where expert judgment plays crucial role.