Improving The Calibration Of Countercyclical Capital Buffer: New Indicators Of Credit Gap In Croatia

The countercyclical capital buffer (CCyB) is one of the key instruments of macroprudential policy. Its purpose is to create additional capital in periods of increasing cyclical risks to provide banks with more space for continuous lending in the crisis period. In the period preceding the crisis, CCyB's can indirectly mitigate excessive lending. The calibration of CCyB starts with the estimation of the credit gap, based on statistical filters used to determine long-term credit activity and to compare it to the one that is observed. The basic idea is to estimate how much the current dynamic deviates from the "equilibrium". Many problems emerged in utilizing such an approach in practice, and this research deals with the possibilities for improving the credit gap assessment in Croatia. In the analysis we combine the quality of signaling features of indicators with our expert judgment. The main results of the research suggest that it is necessary to filter the series of loans and GDP separately, with the assumption that the credit cylce lasts longer than the business cycle. Furthermore, the lack of knowledge of the lenght of the Croatian credit cycle can be mitigated by observing the range of possible credit gaps. New indicators proposed in this study signal the GFC crisis earlier compared to the indicators that HNB used previously. Moreover, the new indicators are more stable. All of this allows for earlier and more gradual CCyB build-up in real-time that is less susceptible to change.