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Alternative frameworks for measuring credit gaps and setting countercyclical capital buffers

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  • Nicolas Reigl
  • Lenno Uuskula

Abstract

This paper complements the standard Basel countercyclical capital buffer framework by suggesting four additional measures for credit gaps that can be used to measure the financial cycle and to decide on countercyclical capital buffers for banks. The new measures behave similarly to the gaps calculated with the standard Basel one-sided Hodrick-Prescott filter in long samples, but they have the properties desired for countries with relatively short historical samples. While the standard Basel credit gaps have been deep in negative territory for many European Union countries since the Great Recession the new gaps are close to zero and the buffers suggested are more in line with the countercyclical capital buffer ratios that were in place in 2018.

Suggested Citation

  • Nicolas Reigl & Lenno Uuskula, 2019. "Alternative frameworks for measuring credit gaps and setting countercyclical capital buffers," Bank of Estonia Working Papers wp2018-07, Bank of Estonia, revised 23 Jan 2019.
    • Handle: RePEc:eea:boewps:wp2018-07
    DOI: 10.23656/25045520/072018/0159
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    References listed on IDEAS

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    1. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2014. "Banking, debt, and currency crises in developed countries: Stylized facts and early warning indicators," Journal of Financial Stability, Elsevier, vol. 15(C), pages 1-17.
    2. Rochelle M. Edge & Ralf R. Meisenzahl, 2011. "The unreliability of credit-to-GDP ratio gaps in real-time: Implications for countercyclical capital buffers," Finance and Economics Discussion Series 2011-37, Board of Governors of the Federal Reserve System (U.S.).
    3. Mathias Drehmann & Kostas Tsatsaronis, 2014. "The credit-to-GDP gap and countercyclical capital buffers: questions and answers," BIS Quarterly Review, Bank for International Settlements, March.
    4. Mathias Drehmann & James Yetman, 2018. "Why you should use the Hodrick-Prescott filter - at least to generate credit gaps," BIS Working Papers 744, Bank for International Settlements.
    5. Rochelle M. Edge & Ralf R. Meisenzahl, 2011. "The Unreliability of Credit-to-GDP Ratio Gaps in Real Time: Implications for Countercyclical Capital Buffers," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 261-298, December.
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    More about this item

    Keywords

    credit gaps; countercyclical capital buffer; Basel III; Estonia;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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