## Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer

_IMF Working Papers, May 1, 2019_

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## Bibliographic details
- Authors: Torsten Wezel
- Published: May 1, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498312097.001

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### Key findings
- 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:
  - computed with a low, smoothing factor; and
  - adjusted for the degree of financial deepening.
- Using a loss function approach to calibrate CCB size highlights a tradeoff between:
  - stability of the buffer size, and
  - cost efficiency considerations.

### Analysis of indicator performance
- 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.

### Calibration of buffer size and policy implications
- Calibrating an appropriate size for the countercyclical capital buffer requires balancing competing objectives:
  - Larger, more stable buffers can better absorb loan losses during stress events.
  - Smaller buffers may be more cost-efficient for the banking sector and the wider economy.
- The loss function framework used in the paper formalizes this tradeoff to guide calibration choices.

### Subjects and keywords (as stated in the source)
- 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

*Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer, Torsten Wezel, May 1, 2019.*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/01/conceptual-issues-in-calibrating-the-basel-iii-countercyclical-capital-buffer-46742_