Question

"Capital conservation buffer" and "capital counter-cyclical buffer" are part of the Basel III capital adequacy requirements.

Why are they increasingly relevant to bank vitality during the ongoing COVID-19 crisis? (approximately 200 words)

Answer 1

Capital conservation buffer and capital counter cyclical buffer are capped with the company according to the basel III capital adequacy requirement and it is kept in order to deal with the adverse economic situations because these buffers are protecting the company from downcycles in the economy because it would be leading to loss of their net assets as many of their net assets will be losing significant chunk of their value so company should be trying to protect a higher amount of higher quality capital in their books of account in order to maintain the sustainability in such adverse economic situations.

At the times of coronavirus crisis, there has been an expectation of impending recession in the global economy and there is an increasing risk of default of loans on the part of the bank and Bank needs to keep these capital conservation buffer as well as countercyclical buffer higher because it is protecting itself against any kind of adverse economic cycle and these buffers are going to protect the bank sustainability by offering it enough protection against bad loans so it will ensure the sustainability of the business in the long run so it is always important to keep a better capital adequacy ratio and higher amount of capital conservation buffer and capital countercyclical buffer according to the Global standard