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How Central Banks Use Countercyclical Capital Buffers
Description
Episode 44 of Monetary Policy Explained unpacks the countercyclical capital buffer (CCyB), a macroprudential tool that central banks use to cool credit markets during booms and release capital during downturns. Lucas and Luna walk through how the Bank of England activated its CCyB in 2025, raising it to 2 percent to dampen a commercial real estate lending surge, and how the European Central Bank followed suit in early 2026. They explain the mechanics—banks must hold extra common equity Tier 1 capital when the CCyB is positive—and contrast it with tools like loan-to-value caps covered in earlier episodes. The hosts discuss the trade-off: buffers can prevent bubbles but risk slowing growth if set too high. They also highlight the release side: during the 2020 pandemic, the Bank of England cut its CCyB to zero, freeing up capital to support lending. By anchoring to the Bank of England's 2025 decision and the ECB's 2026 move, this episode shows how a relatively obscure Basel III tool has become a frontline policy instrument.