Research Discussion Papers, Bank of Finland
No 8/2015:
Indicators used in setting the countercyclical capital buffer
Simo Kalatie ()
, Helinä Laakkonen ()
and Eero Tölö ()
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.
Keywords: countercyclical capital buffer; macroprudential policy; early warning indicators; (follow links to similar papers)
JEL-Codes: G01; G28; (follow links to similar papers)
85 pages, March 16, 2015
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