Indicators Used in Setting the Countercyclical Capital Buffer

85 Pages Posted: 24 Mar 2015

See all articles by Simo Kalatie

Simo Kalatie

Bank of Finland - Finnish Financial Supervision Authority (FIN-FSA)

Helinä Laakkonen

Bank of Finland

Eero Tölö

Bank of Finland - Financial Markets

Date Written: March 11, 2015

Abstract

​According to EU legislation, the national authorities should use the principle of 'guided discretion' in setting the countercyclical capital buffer (CCB), which increases banks' resilience against systemic risk associated with periods of excessive credit growth. This means that the decision should be based on signals from a pre-determined set of early warning indicators, but that there should also be room for discretion, as there is always uncertainty associated with the use of early warning indicators. The European Systemic Risk Board (ESRB) recommends that the authorities use the deviation of the credit-to-GDP ratio from its long term trend value (credit-to-GDP gap) as the primary indicator in setting the CCB. In addition, designated authorities should use in their decision making indicators that measure private sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on an empirical analysis of data on EU countries and a large assortment of potential indicators, we propose a set of suitable early warning indicators for each of these categories.

Keywords: countercyclical capital buffer, macroprudential policy, early warning indicators

JEL Classification: G01, G28

Suggested Citation

Kalatie, Simo and Laakkonen, Helinä and Tölö, Eero, Indicators Used in Setting the Countercyclical Capital Buffer (March 11, 2015). Bank of Finland Research Discussion Paper No. 8/2015, Available at SSRN: https://ssrn.com/abstract=2584435 or http://dx.doi.org/10.2139/ssrn.2584435

Simo Kalatie

Bank of Finland - Finnish Financial Supervision Authority (FIN-FSA) ( email )

Snellmaninkatu 6
P.O. Box 159
FIN-00101 Helsinki
Finland

Helinä Laakkonen

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Eero Tölö (Contact Author)

Bank of Finland - Financial Markets ( email )

P.O Box 160
FIN-00101 Helsinki
Finland

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