IMF Working Papers

Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer

By Torsten Wezel

May 1, 2019

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Torsten Wezel. Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer, (USA: International Monetary Fund, 2019) accessed September 20, 2024

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.

Subject: Credit, Credit gaps, Financial crises, Financial cycles, Financial sector policy and analysis, Housing prices, Money, Prices

Keywords: Basel gap specification, Basel III, BCBS buffer guide, BCBS calibration, BCBS gap definition, Central and Eastern Europe, Credit, Credit gaps, Credit-to-GDP gap, Credit-to-GDP ratio, Eastern Europe, Financial cycles, Global, Housing prices, Loan loss, Macroprudential Policy, Procyclicality, WP

Publication Details

  • Pages:

    27

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/086

  • Stock No:

    WPIEA2019086

  • ISBN:

    9781498312097

  • ISSN:

    1018-5941

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