Countercyclical Capital Buffers: Exploring Options
64 Pages Posted: 27 Jul 2010
Date Written: July 2010
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: Suggested Citation