What are the different capital buffers under Basel III and how do they interact?

Basel III layers multiple capital buffers on top of the minimum CET1 requirement to build resilience in the banking system. Here's how they fit together:

1. Capital Conservation Buffer (CCB) — 2.5%

This is a permanent buffer above the 4.5% minimum. All banks must hold it. If a bank dips into this buffer, it faces automatic restrictions on dividends, share buybacks, and discretionary bonus payments. The restrictions get progressively tighter as the breach deepens.

2. Countercyclical Buffer (CCyB) — 0% to 2.5%

Set by national regulators and activated when credit growth is deemed excessive. For example, if the credit-to-GDP gap in a country widens significantly, the regulator might set the CCyB at 1.5%. During downturns, the buffer can be released to zero, freeing up capital for lending.

3. G-SIB Surcharge — 1% to 3.5%

Only applies to Global Systemically Important Banks. The surcharge depends on the bank's systemic footprint — size, interconnectedness, complexity, cross-border activity, and substitutability. A bank like Meridian Global Holdings (hypothetical G-SIB in bucket 3) would face a 2% surcharge.

Practical stacking example:

What happens on a breach? If Meridian's CET1 falls to 8.5% (below 9.5% but above 7.0%), it enters the buffer zone. The bank must retain a minimum percentage of earnings — it cannot freely distribute dividends until the buffer is restored. This automatic mechanism avoids the stigma of a hard regulatory intervention.

Exam tip: FRM Part II loves testing the order of these buffers and the consequence of breaching each layer. Remember that the stress capital buffer (SCB) used in the US effectively replaces the CCB with a bank-specific floor.

For more Basel III practice, check our FRM Part II question bank on AcadiFi.