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Countercyclical capital buffers: exploring options

Author

Listed:
  • Mathias Drehmann
  • Claudio Borio
  • Leonardo Gambacorta
  • Gabriel Jiminez
  • Carlos Trucharte

Abstract

This paper provides some general lessons for the design of countercyclical capital buffers. Its main empirical contribution is to analyse conditioning variables which could guide the build-up and release of capital. A major distinction for countercyclical capital schemes is whether conditioning variables are bank-specific or system-wide. The evidence presented in the paper indicates that the idiosyncratic component can be sizeable when a bank-specific approach is used. This makes a system-wide approach preferable, for which the best variables as signal for the pace and size of the accumulation of the buffers are not necessarily the best for the timing and intensity of the release. The credit-to-GDP ratio seems best for the build-up phase. Some measure of aggregate losses, possibly combined with indicators of credit conditions, seem to perform well for signalling the beginning of the release phase. Nonetheless, the analysis indicates that designing a fully rule-based mechanism may not be possible at this stage as some degree of judgment seems inevitable. A parallel exercise indicates that reducing the sensitivity of the minimum capital requirement is an important element of a credible countercyclical buffer scheme.

Suggested Citation

  • Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:317
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    References listed on IDEAS

    as
    1. Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2010. "Mitigating the pro-cyclicality of Basel II [Bank loan loss provisions: a re-examination of capital management, earnings management and signalling effects]," Economic Policy, CEPR;CES;MSH, vol. 25(64), pages 659-702.
    2. Rafael Repullo & Javier Suarez, 2008. "The Procyclical Effects of Basel II," Working Papers wp2008_0809, CEMFI.
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Calza, Alessandro & Manrique, Marta & Sousa, Joao, 2006. "Credit in the euro area: An empirical investigation using aggregate data," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 211-226, May.
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    Keywords

    countercyclical capital buffers; financial stability; procyclicality;
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