Capital Buffer


DEFINITION of 'Capital Buffer'

Mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements. Regulations targeting the creation of adequate capital buffers are designed to reduce the procyclical nature of lending by promoting the creation of countercyclical buffers.

BREAKING DOWN 'Capital Buffer'

Capital buffers identified in Basel III reforms include countercyclical capital buffers, which are determined by Basel Committee member jurisdictions and vary according to a percentage of risk weighted assets, and capital conservation buffers, which are built up outside periods of financial stress.

Banks expand their lending activities during periods of economic growth, and contract lending when the economy contracts. When banks without adequate capital run into trouble they can either raise more capital or cut back on lending. If they cut back on lending, businesses may find financing more expensive to obtain or unavailable at all. 

The 2007-2008 financial crisis exposed weaknesses in the balance sheets of many financial institutions across the globe. Bank lending practices were risky, while bank capital was not always enough to cover losses. Some financial institutions became known as “too big to fail” because they were systemically important. To reduce the likelihood of banks running into trouble during economic downturns, regulators began requiring banks to build up capital buffers outside periods of stress.

To give banks enough time to create adequate capital buffers, Basel Committee member jurisdictions announce planned increases twelve months in advance. If economic conditions allow a decrease in required capital buffers those reductions take place immediately.

  1. Basel III

    A comprehensive set of reform measures designed to improve the ...
  2. Primary Reserves

    The minimum amount of cash required to operate a bank. Primary ...
  3. Net Free Reserves

    A statistic released in weekly Federal Reserve data showing the ...
  4. Net Borrowed Reserves

    A statistic released in weekly Federal Reserve data showing the ...
  5. Cash Reserves

    In finance, cash reserves primarily refers to two things. One ...
  6. Non-Borrowed Reserves

    A measure of the reserves in the banking system. Non-borrowed ...
Related Articles
  1. Personal Finance

    Understanding The Basel III International Regulations

    The Basel III regulations mark a drastic reform in international banking. But how do they impact the future's investment landscape?
  2. Insurance

    Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  3. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  4. Savings

    Top 5 Reasons Banks Won't Cash Your Check

    Learn the top reasons that a bank won't cash your check, and find out what steps you can take to prevent those scenarios from happening.
  5. Investing

    How the Rothschild Family Created Their Wealth

    An overview of how the Rothschild dynasty became one of the most powerful families in the world.
  6. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  7. Investing

    2 Undervalued Bank Stocks

    Banks in the industry sweet spot are positioned to perform.
  8. Professionals

    Common Interview Questions for Financial Analysts

    Learn more about the career of financial analyst, along with specific potential interview questions and answers for this type of position.
  9. Professionals

    A Day in the Life of an Investment Banker

    Take a look at a day in the life of an investment banker, one of the most sought-after and stressful jobs in the financial sector.
  10. Budgeting

    When Using a Money Order Makes Sense

    Money orders are usually the least expensive way to send "cleared" funds to pay a bill (or traffic ticket). Here's how they work and what to watch out for.
  1. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Full Answer >>
  2. Will Netspend cards let you overdraw your account?

    NetSpend lets cardholders overdraw their accounts, but only if they previously enrolled in the overdraft protection service. ... Read Full Answer >>
  3. Does the FDIC cover credit unions?

    The Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. The FDIC only insures deposits in banks and ... Read Full Answer >>
  4. Does the FDIC cover business accounts?

    Bank deposits owned by corporations, partnerships, limited liability companies (LLCs), and unincorporated associations, including ... Read Full Answer >>
  5. What are Santander's escheatment services?

    Escheatment is the process where an individual's assets are considered abandoned and the custody of said assets is assigned ... Read Full Answer >>
  6. How can I avoid escheatment of my bank account?

    To avoid escheatment of a bank deposit account, either checking or savings, the owner should log on to his online account; ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center