To dampen procyclical credit flows and ensure the banking sector maintains sufficient loss-absorbing capacity through shifting economic cycles, central banks implement the Countercyclical Capital Buffer (CCyB).

The CCyB functions as an adjustable capital requirement built on top of minimum Basel III thresholds:

[Credit-to-GDP Gap Spikes] ---> Regulators Raise CCyB (Up to 2.5%) ---> Banks Retain Earnings to Build Capital
                                                                                  |
                                                                                  v
[Banks Use Reserves to Absorb Losses] <--- Regulators Cut CCyB to Zero <----------+

During periods of excessive credit growth, regulators raise the CCyB requirement (up to 2.5% of risk-weighted assets). This mandate forces banks to retain earnings and strengthen their capital cushions during economic booms. When a crisis hits and a recession begins, regulators lower the CCyB back to zero, allowing banks to use those capital reserves to absorb losses and continue lending to businesses and households.