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Anchoring countercyclical capital buffers: the role of credit aggregates

  • Mathias Drehmann
  • Claudio Borio
  • Kostas Tsatsaronis

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 as this variable captures the build-up of system-wide vulnerabilities that typically lead to banking crises. Other indicators, such as credit spreads, are better in indicating the release phase as they are contemporaneous signals of banking sector distress that can precede a credit crunch.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 355.

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Length: 39 pages
Date of creation: Nov 2011
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Handle: RePEc:bis:biswps:355
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