Economies grow and contract in cycles.

During contractions when economic activity gets smaller, banks face greater risks than they do in times of growth, mainly due to the fact that borrowers are more likely to default on their loans. To counter this risk, banks are required to hold an additional buffer of CET1 when there is a buildup of systemic economic risk. This is referred to as the countercyclical buffer or CCyB, and consists of CET1 capital and ranges between 0 and 2.5% of the banks RWAs. The buffer is set and monitored by national regulators, when the risk of economic contraction is increasing regulators are likely to increase the countercyclical buffer to ensure that banks build up sufficient capital to be able to survive any increase in defaults on loans, which may occur as a result of an economic downturn. Where the risk of economic contraction is decreasing, regulators will be likely to reduce the countercyclical buffer since there is less need to hold capital if there is a lower risk of loan defaults increasing. If the minimum buffer is breached by a bank. Regulators can impose constraints on the ability of the bank to distribute capital, either in the form of dividends to shareholders or through limitations on the bank's ability to pay bonuses to its staff.