Countercyclical Capital Buffers: Exploring Options

64 Pages Posted: 27 Jul 2010

See all articles by Mathias Drehmann

Mathias Drehmann

Bank for International Settlements (BIS)

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Gabriel Jiménez

Banco de España

Carlos Trucharte

Banco de España

Date Written: July 2010

Abstract

This paper provides some general lessons for the design of counter-cyclical capital buffers. Its main empirical contribution is to analyze conditioning variables which could guide the build-up and release of capital. A major distinction for counter-cyclical capital schemes is whether conditioning variables are bank-specific or system-wide. The evidence presented in the paper indicates that the idiosyncratic component can be sizable when a bank-specific approach is used. This makes a system-wide approach preferable, for which the best variables as signal for the pace and size of the accumulation of the buffers are not necessarily the best for the timing and intensity of the release. The credit-to-GDP ratio seems best for the build-up phase. Some measure of aggregate losses, possibly combined with indicators of credit conditions, seem to perform well for signaling the beginning of the release phase. Nonetheless, the analysis indicates that designing a fully rule-based mechanism may not be possible at this stage as some degree of judgment seems inevitable. A parallel exercise indicates that reducing the sensitivity of the minimum capital requirement is an important element of a credible counter-cyclical buffer scheme.

Keywords: countercyclical capital buffers, financial stability, procyclicality

JEL Classification: E44, E61, G21

Suggested Citation

Drehmann, Mathias and Borio, Claudio E.V. and Gambacorta, Leonardo and Jimenez, Gabriel and Trucharte, Carlos, Countercyclical Capital Buffers: Exploring Options (July 2010). BIS Working Paper No. 317, Available at SSRN: https://ssrn.com/abstract=1648946 or http://dx.doi.org/10.2139/ssrn.1648946

Mathias Drehmann (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Claudio E.V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gabriel Jimenez

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Carlos Trucharte

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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