Finding Indicator Variables for Countercyclical Capital Buffer: The Case of Korea (in Korean)

Countercyclical capital buffer in Basel III is a macropudential tool that aims to reduce procyclicality in financial intermediation. It requires banks to set aside additional capital buffer in times of credit overheating, and allows them to release the buffer when a breakdown in credit intermediation is imminent. To operationalize this buffer, it is important to find information variables that enable policymakers to determine whether current credit activities are overheated, to the extent that it can lead to a significant financial crisis afterwards. We explore indicator variables necessary for implementing countercyclical capital buffer in Korea. To do so, we first collect 42 variables in 7 sectors including credit aggregates, financial markets, and macroeconomic variables. We then evaluate the past performance of those variables to predict financial crises in Korea since 1981, using AUROC(area under receiver operating characteristic), loss function, and noise-to-signal ratio. The results show that credit variables such as the credit to non-financial firms and households are the most useful in determining when to build up the buffer, and so are financial market variables such as credit spread in determining when to release the buffer. A multi-variable approach, using mostly credit aggregate variables, has high explanatory power on the occurrence of past financial crises.