IMF Working Papers

Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer

Author/Editor:

Torsten Wezel

Publication Date:

May 1, 2019

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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. 2019/086

Subject:

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