To prevent the pro-cyclicality of the financial system, Basel III introduced a ___ Capital Buffer, which requires banks to hold extra capital during periods of excessive credit growth that can be released during an economic downturn.

Answer: Countercyclical

Banks naturally lend too much during economic booms (fueling asset bubbles) and stop lending during busts (worsening recessions). The Countercyclical Capital Buffer forces regulators to mandate extra capital reserves when credit is expanding dangerously fast. When the bubble bursts and the economy slows, this buffer is released, giving banks the capital needed to continue lending and support the recovery.