Setting Countercyclical Capital Buffers Based on Early Warning Models: Would it Work?

44 Pages Posted: 8 Nov 2013

See all articles by Markus Behn

Markus Behn

European Central Bank (ECB)

Carsten Detken

European Central Bank (ECB)

Tuomas A. Peltonen

European Central Bank (ECB)

Willem Schudel

European Central Bank (ECB)

Date Written: October 16, 2013

Abstract

This paper assesses the usefulness of private credit variables and other macrofinancial and banking sector indicators for the setting of Basel III/CRD IV countercyclical capital buffers (CCBs) in a multivariate early warning model framework, using data for 23 EU Members States from 1982 Q2 to 2012 Q3. We find that in addition to credit variables, other domestic and global financial factors such as equity and house prices as well as banking sector variables help to predict vulnerable states of the economy in EU Member States. We therefore suggest that policy makers take a broad approach in their analytical models supporting CCB policy measures.

Keywords: Basel III; CRD IV; countercyclical capital buffer; financial regulation; banking crises; early warning model

JEL Classification: G01, G21, G28

Suggested Citation

Behn, Markus and Detken, Carsten and Peltonen, Tuomas A. and Schudel, Willem, Setting Countercyclical Capital Buffers Based on Early Warning Models: Would it Work? (October 16, 2013). ECB Working Paper No. 1604, Available at SSRN: https://ssrn.com/abstract=2341038 or http://dx.doi.org/10.2139/ssrn.2341038

Markus Behn (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carsten Detken

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Willem Schudel

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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