Calibrating the Magnitude of the Countercyclical Capital Buffer using Market-based Stress Tests

Journal of Money, Credit and Banking (forthcoming)

52 Pages Posted: 16 Jun 2018 Last revised: 29 Sep 2020

Date Written: May 21, 2020

Abstract

This paper proposes a novel methodology to calibrate the magnitude of the countercyclical capital buffer (CCyB) using market-based stress tests. The macroprudential authority in our paper aims to contain the possibility of a breach of a minimum capital ratio in the event of a severe system-wide shock within a certain permissible failure probability. We apply the methodology by stress-testing major banks in six advanced economies on a quarterly basis over a period of 27 years. The estimates suggest that the cap on the CCyB should not be less than around 1.7 percent of total assets. Its potential normal-times level is estimated at approximately 0.8 percent of total assets.

Keywords: Financial stability, capital requirements, CCyB, stress test, marginal expected shortfall, exposure CoVaR

JEL Classification: G10, G21, G28

Suggested Citation

van Oordt, Maarten R.C., Calibrating the Magnitude of the Countercyclical Capital Buffer using Market-based Stress Tests (May 21, 2020). Journal of Money, Credit and Banking (forthcoming), Available at SSRN: https://ssrn.com/abstract=3184521 or http://dx.doi.org/10.2139/ssrn.3184521

Maarten R.C. Van Oordt (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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