The countercyclical capital buffer is an often-overlooked component of APRA's Basel III "macroprudential toolkit" for authorised deposit-taking institutions. But it was the focus of a speech to an Actuaries Institute Banking Seminar in Sydney by Pat Brennan, executive general manager of APRA's policy and advice division. "In short, the countercyclical capital buffer provides a tool that can be used to raise banking sector capital requirements in periods of excess credit growth associated with the build-up of systemic risk [and] can then be released during periods of stress, to reduce the risk of the supply of credit being hindered by regulatory capital requirements," Brennan explained. As the buffer can be set between zero and a maximum of 2.5 per cent of risk-weighted assets, it can be used to add up to an additional 2.5 per cent to existing capital requirements.  APRA uses nine core indicators that are well understood and generally publicly available, relevant and representative of the risks of concern as its first line of sight. These are:  credit growth indicators: credit-to-GDP gap, housing credit growth and business credit growth; asset prices: housing price growth and commercial property price growth; lending indicators: higher-risk residential mortgage lending, business lending conditions, and loan pricing and margins; and financial stress: non-performing loans. "While the core indicators provide a signal on the direction of systemic risk, they will not translate formulaically into decisions on the level of the buffer," Brennan explained. "We originally set the countercyclical buffer at zero per cent at the end of 2015, noting that notwithstanding strong credit growth into housing, there was little to suggest excessive credit growth across the Australian economy more broadly," he said. In what must be a relief for the banking sector, Brennan agreed that now is not the time to apply this particular tool. "In Australia, the countercyclical capital buffer has not been used: it is thus far a new and unused tool in our toolkit. We have not used it so far because we feel the risks to the stability of the banking system can be dealt with through a range of other tools available to us. "Trends in property prices have been signalling heightened risks for some time," he noted.  "APRA has chosen to tackle these risks with other tools. In housing lending, this includes our benchmarks on investor and interest-only lending, as well as substantial supervisory work to improve serviceability standards. The Basel Committee framework suggested that authorities should consider use of the countercyclical capital buffer if the credit-to-GDP gap rose above 2 per cent. In Australia, the credit-GDP gap has been negative for some time, and was -6.4 as at end September 2017. "We have concluded that there is not a case, at this stage, to apply a non-zero countercyclical capital buffer, all things considered. Broadly speaking, the credit-to-GDP ratio is well below its longer-term trend and credit growth indicators are currently showing some signs of softening, higher risk lending for both residential and commercial property is being reduced, and impaired assets are, overall, at modest levels," Brennan said. "With the