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Indicators used in setting the countercyclical capital buffer

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  • Kalatie, Simo
  • Laakkonen, Helinä
  • Tölö, Eero

Abstract

According to EU legislation, the national authorities should use the principle of 'guided discretion' in setting the countercyclical capital buffer (CCB), which increases banks' resilience against systemic risk associated with periods of excessive credit growth. This means that the decision should be based on signals from a pre-determined set of early warning indicators, but that there should also be room for discretion, as there is always uncertainty associated with the use of early warning indicators. The European Systemic Risk Board (ESRB) recommends that the authorities use the deviation of the credit-to-GDP ratio from its long term trend value (credit-to-GDP gap) as the primary indicator in setting the CCB. In addition, designated authorities should use in their decision making indicators that measure private sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on an empirical analysis of data on EU countries and a large assortment of potential indicators, we propose a set of suitable early warning indicators for each of these categories.

Suggested Citation

  • Kalatie, Simo & Laakkonen, Helinä & Tölö, Eero, 2015. "Indicators used in setting the countercyclical capital buffer," Research Discussion Papers 8/2015, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2015_008
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    Cited by:

    1. Virtanen, Timo & Tölö, Eero & Virén, Matti & Taipalus, Katja, 2018. "Can bubble theory foresee banking crises?," Journal of Financial Stability, Elsevier, vol. 36(C), pages 66-81.
    2. V. Coudert & J. Idier, 2016. "An Early Warning System for Macro-prudential Policy in France," Working papers 609, Banque de France.
    3. Virtanen, Timo & Tölö, Eero & Virén, Matti & Taipalus, Katja, 2016. "Use of unit root methods in early warning of financial crises," Research Discussion Papers 27/2016, Bank of Finland.
    4. Torsten Wezel, 2019. "Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer," IMF Working Papers 2019/086, International Monetary Fund.
    5. Mikael Juselius & Nikola Tarashev, 2020. "Forecasting expected and unexpected losses," BIS Working Papers 913, Bank for International Settlements.
    6. Nyholm, Juho & Voutilainen, Ville, 2021. "Quantiles of growth: Household debt and growth vulnerabilities in Finland," BoF Economics Review 2/2021, Bank of Finland.
    7. Elena Deryugina & Alexey Ponomarenko, 2019. "Determination of the Current Phase of the Credit Cycle in Emerging Markets," Russian Journal of Money and Finance, Bank of Russia, vol. 78(2), pages 28-42, June.
    8. Christian Castro & Ángel Estrada & Jorge Martínez, 2016. "The countercyclical capital buffer in spain: an analysis of key guiding indicators," Working Papers 1601, Banco de España.
    9. T. Bennani & C. Couaillier & A. Devulder & S. Gabrieli & J. Idier & P. Lopez & T. Piquard & V. Scalone, 2017. "An analytical framework to calibrate macroprudential policy," Working papers 648, Banque de France.
    10. Martínez, Juan Francisco & Oda, Daniel, 2021. "Characterization of the Chilean financial cycle, early warning indicators and implications for macro-prudential policies," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(1).

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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