According to the Basel Committee’s guidelines, the buffer should come into play when the ratio between aggregate credit provision in the economy and the development of GDP deviates from an average trend. The greater the deviation the greater the increase, and vice versa. However, this is not something that will happen automatically. The decision on whether the buffer should be activated or not will lie with the national authorities. As countries develop at different rates, the capital requirements will also vary from country to country. A bank that is active on several markets will therefore need to calculate its capital requirement on the basis of the geographical distribution of its exposures. Like the capital conservation buffer, the counter-cyclical capital buffer is linked to sanctions on dividends. The counter-cyclical capital buffer is good for several reasons. First, it can be used to counteract the procyclical effects that a risk-weighted capital requirement automatically entails and that result in an unwanted high expansion of credit in upturns and cutbacks in downturns. Second, it can be used to limit the build-up of systemic risks. The reason for this is that the buffer is based on the risks in the economy as a whole rather than in each individual bank. In times of high credit growth, when systemic risks usually develop, the buffer can be activated, thereby increasing the capital requirement for all of the banks at the same time even if the actions of the individual banks do not constitute a risk in themselves.
I intend to devote today’s speech to describing what the new regulations entail, explaining the effects we can expect them to have in Sweden and presenting my view of the regulations. This means that several parts of the speech will be rather technical, but a thorough review is necessary to clarify what the new regulations actually entail. 2 Before I begin I would like to point out that although there has been a great focus on drawing up regulations that promote a more stable financial sector it is important to remember that the sector must be effective so that it can continue to manage deposits, provide loans and conduct payments. Finding a good balance between stability and effectiveness is always an important task. In my view, we have managed to achieve this balance. Why we must develop Basel II Capital inadequate in terms of quantity and quality A basic problem with the current regulations is that they allow the banks to hold far too little risk-bearing capital, and in many cases capital that is of far too poor quality. According to the Basel II regulations the capital base consists of two parts: Tier 1 (or primary) capital and Tier 2 (or supplementary) capital. Together, these should correspond to at least eight per cent of the banks’ risk-weighted assets, of which Tier 1 capital must constitute at least four per cent.