Write short notes on the following: Countercyclical Buffer.

Countercyclical Buffer: This is also one of the key elements of Basel III. The countercyclical buffer has been introduced with the objective to increase capital requirements in good times and use the same in difficult times. The buffer will slow banking activity when it overheats and will encourage lending when times are tough i.e., in difficult times. The buffer will range from 0% to 2.5% of total Risk Weighted Assets (RWA) of the banks, consisting of common equity or other fully loss-absorbing capital. Banks are required to have an additional cushion of capital with which to absorb potential losses, enhancing their resilience and contributing to a stable financial system. It is part of Basel III regulatory capital framework. In essence it is a mechanism to build up additional capital during periods of excessive credit growth when risks of system-wide stress are observed to be growing markedly.