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Anchoring Countercyclical Capital Buffers: The role of Credit Aggregates

  • Mathias Drehmann

    (Bank for International Settlements)

  • Claudio Borio

    (Bank for International Settlements)

  • Kostas Tsatsaronis

    (Bank for International Settlements)

We investigate the performance of different variables as anchors for setting the level of the countercyclical regulatory capital buffer requirements for banks. The gap between the ratio of credit to GDP and its long-term backward-looking trend performs best as an indicator for the accumulation of capital, because this variable captures the build-up of systemwide vulnerabilities that typically lead to banking crises. Other indicators, such as credit spreads, are better at indicating the release phase, as they are contemporaneous signals of banking sector distress that can precede a credit crunch.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 7 (2011)
Issue (Month): 4 (December)
Pages: 189-240

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Handle: RePEc:ijc:ijcjou:y:2011:q:4:a:8
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