New Indicators of Credit Gap in Croatia: Improving the Calibration of the Countercyclical Capital Buffer

The countercyclical capital buffer (CCyB) is a key macroprudential policy instrument, whose purpose is to create additional capital in the periods of increasing cyclical risks in order to provide banks with enough space for continued smooth lending during a crisis. In the pre-crisis period, the CCyB’s purpose can be to indirectly mitigate excessive lending. The calibration of the CCyB starts with the estimation of a credit gap based on statistical filters contrasting the long-term credit activity with the economic activity in order to assess the extent to which current dynamics deviates from the equilibrium. Due to a series of problems that occur in practice, this research examines options for improving credit gap estimation, assessed using the criterion of quality of crisis signalling in a historical sample and expert judgement. The main findings of the research suggest that credit and GDP series should be filtered separately, assuming that the credit cycle lasts longer than the business cycle and that the lack of knowledge about the exact duration of the credit cycle can be remedied by estimating a range of possible credit gaps. The new indicators proposed in the research were found to send earlier signals of the occurrence of crisis and are more stable than the previously used national specific indicators. All this allows for an earlier and more gradual build-up of countercyclical capital buffers, which would be less subject to change.