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Measuring and mitigating cyclical systemic risk in Ireland: The application of the countercyclical capital buffer

Author

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  • O'Brien, Eoin

    (Central Bank of Ireland)

  • O'Brien, Martin

    (Central Bank of Ireland)

  • Velasco, Sofia

    (Central Bank of Ireland)

Abstract

Following a number of years where the activation of the countercyclical capital buffer was limited, it is now becoming an increasingly relevant and actively used macroprudential policy tool across Europe. Against this background, this Note describes the high-level approach taken by the Central Bank of Ireland in setting the countercyclical capital buffer rate applicable to Irish exposures. In addition, the Note discusses issues around the identification of cyclical systemic risk in Ireland, and in particular the role of the credit-to-GDP gap as an appropriate reference indicator for countercyclical capital buffer rate decisions. The Note introduces work within the Central Bank of Ireland to develop a potential alternative reference indicator for informing countercyclical capital buffer decisions. In particular, an alternative measure of the national credit gap which looks to account for structural shifts in the economy and informs the estimation of the cycle through additional variables. This semi-structural measure of cyclical systemic risk addresses some of the main drawbacks of purely statistical methods such as excessively persistent trends, a feature that is particularly desirable in post-crisis circumstances.

Suggested Citation

  • O'Brien, Eoin & O'Brien, Martin & Velasco, Sofia, 2018. "Measuring and mitigating cyclical systemic risk in Ireland: The application of the countercyclical capital buffer," Financial Stability Notes 4/FS/18, Central Bank of Ireland.
  • Handle: RePEc:cbi:fsnote:4/fs/18
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    File URL: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/no-4-measuring-and-mitigating-cyclical-systemic-risk-in-ireland-(o'brien-o'brien-and-velasco).pdf?sfvrsn=8
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    Cited by:

    1. Miroslav Plasil, 2019. "The countercyclical capital buffer rate for covering the usual level of cyclical risks in the Czech Republic," Occasional Publications - Chapters in Edited Volumes,, Czech National Bank.
    2. McQuinn, Kieran, 2018. "Capacity constraints in the Irish economy? A partial equilibrium approach," Research Notes RN20180401, Economic and Social Research Institute (ESRI).
    3. Varthalitis, Petros & Allen-Coghlan, Matthew, 2020. "Comparing two recessions in Ireland: Global financial crisis vs COVID-19," Research Notes RN20200401, Economic and Social Research Institute (ESRI).
    4. Philip R. Lane, 2019. "Globalisation: A Macro-Financial Perspective," The Economic and Social Review, Economic and Social Studies, vol. 50(2), pages 249-263.
    5. Moloney, Kitty & O'Gorman, Paraic & O’Sullivan, Max & Reddan, Paul, 2023. "Non-bank lenders to SMEs as a source of financial stability risk – a balance sheet assessment," Financial Stability Notes 11/FS/23, Central Bank of Ireland.
    6. McQuinn, Kieran & O'Toole, Conor & Allen-Coghlan, Matthew & Coffey, Cathal, 2020. "Quarterly Economic Commentary, Winter 2020," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC2020WIN, August.
    7. Lyons, Paul & Nevin, Ciarán & Shaw, Frances, 2019. "Real-estate concentration in the Irish banking system," Financial Stability Notes 4/FS/19, Central Bank of Ireland.

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