IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2019-039.html
   My bibliography  Save this paper

Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic

Author

Listed:
  • Valentina Flamini
  • Pierluigi Bologna
  • Fabio Di Vittorio
  • Rasool Zandvakil

Abstract

Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.

Suggested Citation

  • Valentina Flamini & Pierluigi Bologna & Fabio Di Vittorio & Rasool Zandvakil, 2019. "Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic," IMF Working Papers 2019/039, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/039
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=46584
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    2. Adam Gersl & Jakub Seidler, 2012. "Excessive Credit Growth and Countercyclical Capital Buffers in Basel III: An Empirical Evidence from Central and East European Countries," ACTA VSFS, University of Finance and Administration, vol. 6(2), pages 91-107.
    3. Drehmann, Mathias & Juselius, Mikael, 2014. "Evaluating early warning indicators of banking crises: Satisfying policy requirements," International Journal of Forecasting, Elsevier, vol. 30(3), pages 759-780.
    4. Claessens, Stijn & Kose, M. Ayhan & Terrones, Marco E., 2012. "How do business and financial cycles interact?," Journal of International Economics, Elsevier, vol. 87(1), pages 178-190.
    5. Mr. Fabian Valencia & Mr. Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 2008/224, International Monetary Fund.
    6. Davis, J. Scott, 2014. "Financial integration and international business cycle co-movement," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 99-111.
    7. 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.).
    8. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2012. "Characterising the financial cycle: don't lose sight of the medium term!," BIS Working Papers 380, Bank for International Settlements.
    9. Piergiorgio Alessandri & Pierluigi Bologna & Roberta Fiori & Enrico Sette, 2015. "A note on the implementation of the countercyclical capital buffer in Italy," Questioni di Economia e Finanza (Occasional Papers) 278, Bank of Italy, Economic Research and International Relations Area.
    10. Ghosh, Amit, 2015. "Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states," Journal of Financial Stability, Elsevier, vol. 20(C), pages 93-104.
    11. Mark Mink & Jan P.A.M. Jacobs & Jakob de Haan, 2012. "Measuring coherence of output gaps with an application to the euro area," Oxford Economic Papers, Oxford University Press, vol. 64(2), pages 217-236, April.
    12. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2011. "Anchoring Countercyclical Capital Buffers: The role of Credit Aggregates," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 189-240, December.
    13. Mr. Kasper Lund-Jensen, 2012. "Monitoring Systemic Risk Basedon Dynamic Thresholds," IMF Working Papers 2012/159, International Monetary Fund.
    14. Adam Geršl & Jakub Seidler, 2012. "Credit Growth and Countercyclical Capital Buffers: Empirical Evidence from Central and Eastern European Countries," Working Papers IES 2012/3, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2012.
    15. 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.
    16. Claudio Borio & Mathias Drehmann, 2009. "Assessing the risk of banking crises - revisited," BIS Quarterly Review, Bank for International Settlements, March.
    17. Samarina, Anna & Zhang, Lu & Bezemer, Dirk, 2017. "Credit cycle coherence in the eurozone: Was there a euro effect?," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 77-98.
    18. Claudio Borio & Philip Lowe, 2002. "Assessing the risk of banking crises," BIS Quarterly Review, Bank for International Settlements, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alessi, Lucia & Detken, Carsten, 2018. "Identifying excessive credit growth and leverage," Journal of Financial Stability, Elsevier, vol. 35(C), pages 215-225.
    2. O'Brien, Martin & Velasco, Sofia, 2020. "Unobserved components models with stochastic volatility for extracting trends and cycles in credit," Research Technical Papers 09/RT/20, Central Bank of Ireland.
    3. Mathias Drehmann & James Yetman, 2021. "Which Credit Gap Is Better at Predicting Financial Crises? A Comparison of Univariate Filters," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-31, October.
    4. Daniel O. Beltran & Mohammad R. Jahan-Parvar & Fiona A. Paine, 2021. "Optimizing Credit Gaps for Predicting Financial Crises: Modelling Choices and Tradeoffs," International Finance Discussion Papers 1307, Board of Governors of the Federal Reserve System (U.S.).
    5. Piergiorgio Alessandri & Pierluigi Bologna & Roberta Fiori & Enrico Sette, 2015. "A note on the implementation of the countercyclical capital buffer in Italy," Questioni di Economia e Finanza (Occasional Papers) 278, Bank of Italy, Economic Research and International Relations Area.
    6. Bruno De Backer & Hans Dewachter & Stijn Ferrari & Mara Pirovano & Christophe Van Nieuwenhuyze, 2016. "Credit gaps in Belgium : identification, characteristics and lessons for macroprudential policy," Financial Stability Review, National Bank of Belgium, vol. 14(1), pages 153-170, June.
    7. Terhi Jokipii & Reto Nyffeler & Stéphane Riederer, 2021. "Exploring BIS credit-to-GDP gap critiques: the Swiss case," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 157(1), pages 1-19, December.
    8. 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.
    9. Tihana Škrinjarić, 2023. "Credit-to-GDP Gap Estimates in Real Time: A Stable Indicator for Macroprudential Policy Making in Croatia," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 65(3), pages 582-614, September.
    10. Jorge E. Galán & Javier Mencía, 2021. "Model-based indicators for the identification of cyclical systemic risk," Empirical Economics, Springer, vol. 61(6), pages 3179-3211, December.
    11. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2011. "Anchoring Countercyclical Capital Buffers: The role of Credit Aggregates," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 189-240, December.
    12. Borio, Claudio, 2014. "The financial cycle and macroeconomics: What have we learnt?," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 182-198.
    13. Rünstler, Gerhard & Balfoussia, Hiona & Burlon, Lorenzo & Buss, Ginters & Comunale, Mariarosaria & De Backer, Bruno & Dewachter, Hans & Guarda, Paolo & Haavio, Markus & Hindrayanto, Irma & Iskrev, Nik, 2018. "Real and financial cycles in EU countries - Stylised facts and modelling implications," Occasional Paper Series 205, European Central Bank.
    14. Saurabh Ghosh, 2015. "Building on the Countercyclical Consensus: An Empirical Test," Working Papers wp08, South East Asian Central Banks (SEACEN) Research and Training Centre.
    15. Xianglong Liu, 2023. "Towards Better Banking Crisis Prediction: Could an Automatic Variable Selection Process Improve the Performance?," The Economic Record, The Economic Society of Australia, vol. 99(325), pages 288-312, June.
    16. Lenarčič, Črt, 2021. "Estimating business and financial cycles in Slovenia," MPRA Paper 109977, University Library of Munich, Germany.
    17. Önundur Páll Ragnarsson & Jón Magnús Hannesson & Loftur Hreinsson, 2019. "Financial cycles as early warning indicators - Lessons from the Nordic region," Economics wp80, Department of Economics, Central bank of Iceland.
    18. Schüler, Yves S. & Hiebert, Paul P. & Peltonen, Tuomas A., 2020. "Financial cycles: Characterisation and real-time measurement," Journal of International Money and Finance, Elsevier, vol. 100(C).
    19. Hartwig, Benny & Meinerding, Christoph & Schüler, Yves S., 2021. "Identifying indicators of systemic risk," Journal of International Economics, Elsevier, vol. 132(C).
    20. Aikman, David & Bridges, Jonathan & Hacioglu Hoke, Sinem & O’Neill, Cian & Raja, Akash, 2019. "Credit, capital and crises: a GDP-at-Risk approach," Bank of England working papers 824, Bank of England, revised 18 Oct 2019.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2019/039. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.