Under the Basel III international regulatory framework, what is the primary purpose of the 'Capital Conservation Buffer' (CCB)?
- To protect banks against systemic risks arising from cross-border lending
- To ensure banks build up capital outside periods of stress that can be drawn down when losses are incurred
- To penalize banks that hold excessive amounts of sovereign debt
- To guarantee depositors that their savings are 100% insured against bank failures
Answer: To ensure banks build up capital outside periods of stress that can be drawn down when losses are incurred
The CCB is an additional layer of high-quality capital (usually 2.5% of risk-weighted assets) that banks must hold during normal economic times. The objective is to create a financial cushion that allows banks to absorb losses during periods of economic or financial stress without breaching their minimum capital requirements or requiring taxpayer bailouts.