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Setting countercyclical capital buffers based on early warning models: would it work?

  • Behn, Markus
  • Detken, Carsten
  • Peltonen, Tuomas A.
  • Schudel, Willem

This paper assesses the usefulness of private credit variables and other macrofinancial and banking sector indicators for the setting of Basel III / CRD IV countercyclical capital buffers (CCBs) in a multivariate early warning model framework, using data for 23 EU Members States from 1982 Q2 to 2012 Q3. We find that in addition to credit variables, other domestic and global financial factors such as equity and house prices as well as banking sector variables help to predict vulnerable states of the economy in EU Member States. We therefore suggest that policy makers take a broad approach in their analytical models supporting CCB policy measures. JEL Classification: G01, G21, G28

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Paper provided by European Central Bank in its series Working Paper Series with number 1604.

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Date of creation: Nov 2013
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Handle: RePEc:ecb:ecbwps:20131604
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  19. Alessi, Lucia & Detken, Carsten, 2011. "Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity," European Journal of Political Economy, Elsevier, vol. 27(3), pages 520-533, September.
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