{
  "title": "Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer",
  "publication": "IMF Working Papers, May 1, 2019",
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  "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",
  "sections": [
    {
      "heading": "Key findings",
      "content": "- The credit-to-GDP gap, the main indicator in the Basel III framework for buffer decisions, does not always best cover bank loan losses that exceed what would be expected from economic downturns.\n- For countries with short financial cycles and/or low financial deepening (for example, transition and developing economies), the Basel gap performs best when:\n  - computed with a low, smoothing factor; and\n  - adjusted for the degree of financial deepening.\n- Using a loss function approach to calibrate CCB size highlights a tradeoff between:\n  - stability of the buffer size, and\n  - cost efficiency considerations."
    },
    {
      "heading": "Analysis of indicator performance",
      "content": "- The paper evaluates the Basel gap (credit-to-GDP gap) across a sample of EU countries and compares its ability to signal and cover loan losses beyond cyclical downturns.\n- Adjustment for financial deepening is important in economies with lower levels of financial development or shorter financial cycles.\n- A lower smoothing factor in the Basel gap computation improves performance in these economies."
    },
    {
      "heading": "Calibration of buffer size and policy implications",
      "content": "- Calibrating an appropriate size for the countercyclical capital buffer requires balancing competing objectives:\n  - Larger, more stable buffers can better absorb loan losses during stress events.\n  - Smaller buffers may be more cost-efficient for the banking sector and the wider economy.\n- The loss function framework used in the paper formalizes this tradeoff to guide calibration choices."
    },
    {
      "heading": "Subjects and keywords (as stated in the source)",
      "content": "- Subjects: Credit, Credit gaps, Financial crises, Financial cycles, Financial sector policy and analysis, Housing prices, Money, Prices\n- 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\n\nConceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer, Torsten Wezel, May 1, 2019.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2019/05/01/conceptual-issues-in-calibrating-the-basel-iii-countercyclical-capital-buffer-46742"
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    "Authors: Torsten Wezel",
    "Published: May 1, 2019",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781498312097.001",
    "The credit-to-GDP gap, the main indicator in the Basel III framework for buffer decisions, does not always best cover bank loan losses that exceed what would be expected from economic downturns.",
    "For countries with short financial cycles and/or low financial deepening (for example, transition and developing economies), the Basel gap performs best when:",
    "Using a loss function approach to calibrate CCB size highlights a tradeoff between:",
    "The paper evaluates the Basel gap (credit-to-GDP gap) across a sample of EU countries and compares its ability to signal and cover loan losses beyond cyclical downturns.",
    "Adjustment for financial deepening is important in economies with lower levels of financial development or shorter financial cycles.",
    "A lower smoothing factor in the Basel gap computation improves performance in these economies.",
    "Calibrating an appropriate size for the countercyclical capital buffer requires balancing competing objectives:",
    "The loss function framework used in the paper formalizes this tradeoff to guide calibration choices.",
    "Subjects: 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",
    "**Working Paper**"
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