Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer

Author/Editor:

Torsten Wezel

Publication Date:

May 1, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper discusses issues in calibrating the countercyclical capital buffer (CCB) based on a sample of EU countries. It argues that the main indicator for buffer decisions under the Basel III framework, the credit-to-GDP gap, does not always work best in terms of covering bank loan losses that go beyond what could be expected from economic downturns. Instead, in the case of countries with short financial cycles and/or low financial deepening such as transition and developing economies, the Basel gap is shown to work best when computed with a low, smoothing factor and adjusted for the degree of financial deepening. The paper also analyzes issues in calibrating an appropriate size of the CCB and, using a loss function approach, points to a tradeoff between stability of the buffer size and cost efficiency considerations.

Series:

Working Paper No. 19/86

Subject:

English

Publication Date:

May 1, 2019

ISBN/ISSN:

9781498312097/1018-5941

Stock No:

WPIEA2019086

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

27

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