The countercyclical capital buffer (CCB) was proposed by the Basel committee to increase the resilience of the banking sector to negative shocks. The interactions between banking sector losses and the real economy highlight the importance of building a capital buffer in periods when systemic risks are rising. Basel III introduces a framework for a time-varying capital buffer on top of the minimum capital requirement and another time-invariant buffer (the conservation buffer). The CCB aims to make banks more resilient against imbalances in credit markets and thereby enhance medium-term prospects of the economy—in good times when system-wide risks are growing, the regulators could impose the CCB which would help the banks to withstand losses in bad times. It is expected that the build-up of additional capital during a boom may diminish the desire of banks to lend excessively.5 Conversely, in a downturn the release of the CCB may avoid a credit crunch, by reducing the pressure on banks to deleverage to meet regulatory capital requirements. However, the effectiveness of the CCB in smoothing the credit cycle and therefore procyclicality of credit will depend on the level of capital that banks hold in excess of what the regulator requires. Issuing new equity is relatively cheap in a boom, reducing the effect of the buffer on credit expansion.6 More generally, effects on overall credit and the real economy will depend on the extent to which non-financial firms can find substitute credit from non-regulated financial intermediaries and in markets.