Thus, capital requirements would rise in expansionary phases of the credit cycle and fall in recessionary periods, using a series of benchmark financial cycle indicators. In fact, this tool is known as the “countercyclical capital buffer” (CCyB) and, as with the other two I will now describe, it was introduced into Spanish banking regulations further to the transposition of the European capital requirements legislation which, in turn, is the application of the Basel III Accord in the EU. The tools designed to address the cross-sectional dimension of systemic risk are more geared to last over time, whereby they tend to be more stable throughout the financial cycle. The first is the buffer for systemically important institutions (at the global or national level), which is applied exclusively to those banks previously identified as capable of destabilising the system if they run into financial problems. The greater aggregate risks associated with these institutions warrant demanding of them some extra protection against shocks.6 Systemic institutions are identified following standardised methods both globally and locally. Specifically, the FSB and the BCBS globally coordinate the exercise involving the definition of global systemically important institutions. This exercise uses a methodology based on weighted metrics of various bank variables, such as size, complexity, interconnectedness, ability to replace their activities and volume of cross-border activity. The Banco de España, meanwhile, annually conducts an exercise to identify systemically important institutions at the national level, using a standardised European methodology very similar to that used at the global level.
As I noted earlier, effectiveness of the domestic policy response tends to weaken when the challenge is of a global nature. A case in point is the current cycle of capital flows which, in essence, is a global phenomenon driven by exceptionally low interest rates in the major economies. Hence, policy response calibrated with domestic orientation may be of limited use if the problems at the source remain. This means that the thinking on policy needs to broaden to explore possible benefits of a closer coordination of policies between countries, especially when central banks face similar challenges of a global nature like capital flows. Such coordination will elevate central banks’ policy-making to a new level, commensurate with the new challenge posed by the post-crisis globalisation. 2  BIS Review 138/2010